chapter 2210 relationships between physicians and · pdf filerelationships between physicians...

Chapter 2210Relationships Between Physicians and Hospitals

Contents2210.10 The Stark Law

-.10 General Prohibition and Key Terms-.20 Relationship to Anti-Kickback Law

2210.20 Applicable Stark Exceptions-.10 Overview-.20 Bona Fide Employment Arrangements-.30 Personal Services-.40 Remuneration Unrelated to DHS-.50 Rental of Space or Equipment-.60 Physician Recruitment-.70 Isolated Transactions-.80 In-Office Ancillary Services-.90 Academic Medical Centers-.100 Non-Monetary Compensation-.110 Fair Market Value Compensation-.120 Incidental Medical Staff Benefits-.130 Physician Compliance Training-.140 Indirect Compensation Arrangements-.150 Risk-Sharing Arrangements-.160 Professional Courtesy/ Intra-Family Rural

Referrals-.170 Physician Services-.180 Referral Services/ Malpractice Insurance-.190 Retention Payments (Underserved Areas)

-.200 Community-Wide Health InformationSystems

-.210 Electronic Prescribing Systems-.220 Electronic Health Records Technology-.230 Ownership Interest in Entire Hospitals

2210.30 Compliance-.10 Overview-.20 Temporary Noncompliance Rules-.30 Period of Disallowance-.40 Self-Disclosure

2210.40 Gainsharing Arrangements-.10 Overview-.20 Scope of the Prohibition-.30 Application to Particular Arrangements-.40 Congressional Initiatives

2210.50 Enforcement-.10 Overview-.20 Settlements-.30 Court Rulings-.40 Stark Self-Disclosure Settlements

Exh. 1 Relationships Between Physicians andHospitals Checklist

Acknowledgments•Mary Beth F. Johnston, Esq., and Amy O. Garrigues, Esq., with K&L Gates, L.L.P., Research Triangle Park,N.C., reviewed and updated this chapter and checklist. Their former colleague, Patricia T. Meador, Esq., then withKennedy Covington Lobdell & Hickman, L.L.P., Research Triangle Park, N.C., contributed to an earlier version.

No. 146

2210:101Copyright � 2012 by The Bureau of National Affairs, Inc.8–20–12ISBN 1-55871-427-8

http://www.klgates.com/mary-beth-f-johnston/

http://www.klgates.com/amy-o-garrigues/

Chapter 2210Relationships Between Physicians and Hospitals

OverviewFederal laws prohibit a wide range of financial dealings between physicians and the hospitals to which they

refer. At the same time, financial relationships between these two providers are necessary and helpful tofurther legitimate business objectives. With federal enforcement continuing to increase in this area, providersmust be diligent to ensure physician-hospital transactions are structured to comply with the law and do notgenerate illegal referrals or reimbursement claims.

This chapter discusses two major areas of concern related to financial relationships with physicians—theStark law on ‘‘self-referrals’’ and the prohibition on ‘‘gainsharing.’’ For an overview of the Stark law, seeChapter 2205, Key Concepts and Terms. Stark law self-referral limitations in the context of physicianspracticing together are discussed in Chapter 2215, Group Practices. The closely related anti-kickback law isdiscussed in Chapter 1805, Hospital Incentives to Physicians. Penalties for violations are outlined in Chapter210, Penalties.

Stark Law. The federal physician self-referral law, or Stark law, seeks to remove incentives that couldinappropriately tie a physician’s treatment decision to financial reward and result in overutilization of medicalcare. The original statute (Stark I) addressed physician referrals for clinical laboratory services. The law wasexpanded later (Stark II) to include many more services, referred to as ‘‘designated health services’’ (DHS).CMS has issued commentary and revised the Stark regulations in three principal phases.

The CMP Law and Gainsharing. The Civil Monetary Penalty provisions of the Social Security Act prohibitany hospital or critical access hospital from knowingly making a payment, directly or indirectly, as aninducement to reduce or limit services to a Medicare or Medicaid beneficiary under the physician’s direct care.1Gainsharing is an issue only for Medicare and Medicaid fee-for-service systems; the prohibition2 does not applyto managed care plans (see Chapter 2620, Underutilization and Quality of Care, for treatment of capitatedmanaged care organization physician incentive plans).

2210.10 The Stark Law2210.10.10General Prohibition and Key Terms

Overview. The Stark law prohibits a physician orimmediate family member who has a ‘‘financial relation-ship’’ with an entity, such as a hospital—including psy-chiatric hospitals and rural primary care hospitals—from making ‘‘referrals’’ to that entity for ‘‘designatedhealth services’’ (DHS) covered by Medicare, unless thefinancial relationship fits within an enumerated excep-tion in the Stark law.3 It also prohibits the submission ofreimbursement claims resulting from such referrals. A‘‘financial relationship’’ under Stark can be a direct orindirect compensation arrangement or ownership inter-est.

The Scope of the Prohibition. Corresponding to thelaw’s broad definition4 of ‘‘remuneration,’’ which is notlimited to relationships involving Medicare patients orrelationships that provide DHS, the Stark prohibition

can reach a wide range of activities. Take the example ofa physician who owns a small interest in a restaurant. Ifthe development director of the local hospital regularlycontracts to have the restaurant cater luncheons at thehospital, a financial relationship exists between the phy-sician and the hospital that would need to be analyzedunder the Stark law to ensure that the doctor is notprohibited from referring Medicare patients to the hos-pital. Under Stark, this financial relationship is indirect(the physician owns an interest in an intervening entitythat contracts with the hospital). Because some of thelinks in the chain of relationships are ownership andsome are compensation relationships, the final regula-tions would require one to analyze the situation underthe ‘‘indirect compensation arrangement’’ definition andnot as an indirect ownership. (See Chapter 2220, Directand Indirect Relationships).

It is necessary to thoroughly analyze the facts sur-rounding any arrangement that might be subject to the

1 Social Security Act § 1128A(b) [42 U.S.C. § 1320a-7a(b)].2 Office of Inspector Gen., U.S. Dep’t of Health & Human

Servs., Advisory Op. No. 01-1 (Jan. 18, 2001).

3 Social Security Act § 1877 [42 U.S.C. § 1395nn].4 Social Security Act § 1877(h)(1)(B)-(C) [42 U.S.C. § 1395nn-

(h)(1)(B)-(C)].

No. 142 §2210.10.10


physician self-referral prohibition. If it is determinedthat the arrangement does not qualify as a financialrelationship under the Stark law, it is not necessary forthe arrangement to comply with a Stark exception (see,e.g., CMS advisory opinion at n.188, infra).

DHS. The Stark law lists categories of DHS thatCongress identified as being subject to overuse or inap-propriate use if provided by an entity in which a physi-cian has a financial interest. These include the followingitems and services:

• clinical laboratory services;

• physical therapy services;

• occupational therapy services;

• radiology services, including magnetic resonanceimaging, computerized axial tomography scans, and ul-trasound services;

• radiation therapy services and supplies;

• durable medical equipment and supplies;

• parenteral and enteral nutrients, equipment, andsupplies;

• prosthetics, orthotics, and prosthetic devices andsupplies;

• home health services;

• outpatient prescription drugs;

• inpatient and outpatient hospital services; and

• outpatient speech-language pathology services.Notably, lithotripsy is not considered DHS, as the

result of a 2002 court decision.5

Definition of Entity. The definition of ‘‘entity’’ wasrecently expanded under Stark. Prior to October 1,2009, ‘‘entity’’ was defined as the person or entity thatbills for DHS. Effective October 1, 2009, the definitionof ‘‘entity’’ has expanded to include the one performingthe services that are billed as DHS.

As a result of the expanded definition of entity, afull-service, turnkey ‘‘under arrangements’’ serviceprovider6 may now be considered to be a DHS entity.Accordingly, physicians’ ownership interests in suchproviders would be considered to be direct financialrelationships requiring a Stark exception. Absent a situ-ation involving providers residing in a rural area (whomay be able to rely upon the rural provider ownershipexception), there is no statutory or regulatory exceptionfor ownership interests for the physician investors.Therefore, the ‘‘entity’’ definition may effectively elimi-nate referring physicians’ ability to own interests in‘‘under arrangements’’ service providers, and many of

these arrangements have been restructured or un-wound.

Exceptions. A number of exceptions to the generalStark law prohibition on referrals exist,7 including thoseapplicable:

• to both ownership/investment interests and com-pensation arrangements;

• only to ownership and investment interests; and

• only to compensation arrangements.The statutory and regulatory exceptions most rel-

evant to referring physicians in financial relationshipswith hospitals include those covering:

• rental of space and equipment;

• bona fide employment arrangements;

• personal service arrangements;

• remuneration unrelated to DHS;

• physician recruitment arrangements;

• isolated transactions;

• academic medical centers;

• non-monetary compensation that is less than theamount set annually by CMS;

• fair market value compensation;

• incidental medical staff benefits;

• compliance training;

• indirect compensation arrangements;

• electronic prescribing systems;

• electronic health record items and services; and

• ownership interests in hospitals.The exceptions most applicable to physicians refer-

ring within their group practices are the physician ser-vices and in-office ancillary services exceptions.

Stark and Managed Care Plans. The Stark law doesnot directly apply to services furnished by certain pre-paid plans,8 including services furnished by managedcare plans, such as health maintenance organizations(HMOs), to their enrollees and services furnished themby hospitals and others under contract to the HMO.Among the health plans exempted from Stark are Medi-care Advantage (MA) ‘‘coordinated care plans,’’ demon-stration project managed care organizations, healthcare prepayment plans, HMOs qualifying under thePublic Health Service Act, and Medicaid managed careplans similar to the Medicare managed care plans al-ready included in the exception.9

5 American Lithotripsy Society v. Thompson, No. 01-01812(D.D.C., July 12, 2002); see also IPPS final rule FY 2009, 73 Fed.Reg. at 48719. CMS has noted, however, that regardless ofwhether lithotripsy is DHS, contractual relationships betweenhospitals and physicians or physician practices regarding litho-tripsy can rise to the level of a ‘‘financial relationship’’ under Starkif the physician makes non-lithotripsy referrals to the hospitaland that, unless the relationship falls into an exception, the phy-sicians may not refer Medicare patients to the hospital for any

inpatient or outpatient services. Stark II final rule, Phase I, 66Fed. Reg. at 940.

6 An ‘‘under-arrangements’’ service provider is a provider thatfurnishes a service for which the hospital bills.

7 Social Security Act § 1877(b)-(e) [42 U.S.C. § 1395nn(b)-(e)].8 Excepted prepaid services are described in Social Security

Act § 1877(b)(3) [42 U.S.C. § 1395nn(b)(3).9 42 C.F.R. § 411.355(c).

§2210.10.10 No. 142PHYSICIAN FINANCIAL RELATIONSHIPS

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2210.10.20Relationship to Anti-Kickback Law

Arrangements between hospitals (or other DHS en-tities) and referring physicians must comply with boththe Stark and anti-kickback statutes (see Chapter 1805,Hospital Incentives to Physicians). However, only theanti-kickback law applies to referrals between otherkinds of providers.

While many exceptions under the two statutes aresimilar, such as the exceptions for personal service ar-rangements and space and equipment rentals, their ef-fect is quite different. The Stark law is a strict liabilitystatute—a financial arrangement between a referringphysician and a DHS entity is in violation of the Starklaw unless an exception applies. Therefore, a financialarrangement between a physician and a DHS entity

that would otherwise result in a prohibited Stark refer-ral must meet a Stark exception. However, the anti-kickback statute requires improper intent. Accordingly,failure to comply with a ‘‘safe harbor’’ under the anti-kickback statute does not render an arrangement illegalper se. Rather, a provider might be in compliance withthe anti-kickback statute without meeting a safe harbor.The anti-kickback safe harbors do, however, afford au-tomatic protection from prosecution.

Health reform legislation passed in 2010, clarifyingthat the element of ‘‘intent’’ under the anti-kickbackstatute does not require a showing of specific intent toviolate the anti-kickback statute.10 The legislation alsoexplicitly stated that a violation of the federal anti-kickback law is a false claim under the federal FalseClaims Act.11

2210.20 Applicable Stark Exceptions2210.20.10Overview

In ensuring physician/hospital relationships complywith the Stark law, compliance officers and counsel willfind several statutory exceptions to be particularly per-tinent including those for bona fide employment ar-rangements, personal services, remuneration unrelatedto DHS, rental of space or equipment, physician recruit-ment, and isolated transactions. Each of these statutoryexceptions has a similar exception set forth in the Starkregulations.

The regulations also contain a number of additionalexceptions; for hospital/physician relationships, perti-nent additional regulatory exceptions include those gov-erning fair market value compensation, incidental medi-cal staff benefits, academic medical centers, compliancetraining, indirect compensation arrangements, obstetri-cal malpractice insurance subsidies, retention paymentsin underserved areas, community-wide health informa-tion systems, and electronic health record items andservices.

For physician referrals within group practices, thestatutory and regulatory exceptions for physician ser-vices and in-office ancillary services are particularlyrelevant. For an explanation of what constitutes desig-nated health services and the conditions under which‘‘peripheral’’ services that otherwise would be classifiedas DHS lose that classification, see Chapter 2205, KeyConcepts and Terms.

2210.20.20Bona Fide Employment Arrangements

Unlike the anti-kickback safe harbor for bona fideemployment contracts, which exempts all remunerationresulting from such contracts regardless of the form ofcompensation, the Stark exception exempts onlyamounts paid under a contract that meets certain stan-dards12 (see Chapter 1430, Marketing Practices,§ 1430.10.20.40).

Remuneration under the compensation arrangementmust be:

• for identifiable services compensated at fair mar-ket value,

• determined in a manner that does not take intoaccount (directly or indirectly) the volume or value ofany referrals, and

• commercially reasonable even if no referrals aremade to the employer.

Physicians can be paid a productivity bonus for per-sonally performed services, including personally per-formed DHS.13 Also, unlike other Stark exceptions, acompensation arrangement with an employed physi-cian, except in certain situations, does not have to be inwriting.14

2210.20.30Personal Services

The exception for personal services—including pro-fessional services and excluding provision of items orequipment of any kind—is one of the more useful ex-ceptions because it applies to such common situations as

10 42 U.S.C. § 1320a-7b(b), as amended by the Patient Protec-tion and Affordable Care Act (PPACA), Pub. L. No. 111-148,§ 6402(f), effective for dates after March 22, 2010. The amendedintent standard also applies to the other criminal violations enu-merated in 42 U.S.C. § 1320a-7b.

11 See also Tab 1400, Anti-Kickback—General Risk Areas.

12 Social Security Act § 1877(e)(2) [42 U.S.C. § 1395nn(e)(2)]; 42C.F.R. § 411.357(c).

13 42 C.F.R. § 411.357(c)(4).14 Stark contains a special rule that allows a employer to con-

dition compensation on the physician’s referrals to a particularprovider, provided that the compensation arrangement meets thespecific requirements set forth at 42 C.F.R. § 411.354(d)(4).

No. 146 §2210.20.30RELATIONSHIPS BETWEEN PHYSICIANS AND HOSPITALS


hospital-based physician contracts or medical directoragreements for the provision of administrative services.

To meet the exception, the arrangement must:15

• be in writing, be signed by the parties, and specifythe services covered by the arrangement;

• be for a term of at least one year (if terminatedduring the first year, the parties may not enter into thesame or substantially the same arrangement during thefirst year of the original term of the arrangement);

• cover all services the physician or immediate fam-ily member will furnish to the hospital (requirement ismet if separate arrangements between the entity andthe physician or any family members incorporate eachother by reference or if they cross-reference a masterlist of contracts that is maintained and updated cen-trally);

• contract for aggregate services that do not exceedthose that are reasonable and necessary for the legiti-mate business purposes of the arrangement;

• be for services that do not involve the counselingor promotion of a business arrangement or other activ-ity that violates state or federal law; and

• pay compensation that is set in advance, does notexceed fair market value (FMV), and, except in the caseof a physician incentive plan, is not determined in amanner that takes into account the volume or value ofany referrals or other business generated between theparties.

Set in Advance. CMS considers compensation ‘‘set inadvance’’ if the aggregate compensation, a time-basedor per-unit-of-service-based amount (whether per-useor per-service), or a specific formula for calculating thecompensation is agreed to by the parties and set out inwriting before any items or services subject to theagreement are furnished.16 The agency said that thecompensation formula satisfies the set-in-advance re-quirement if it 1) is set forth in such detail that it can beobjectively verified and 2) is not changed or modifiedduring the course of the agreement in any manner thatreflects the volume or value of referrals or other busi-ness generated by the referring physician.17

Taking Into Account the Volume or Value of Refer-rals or Other Business Generated. Unit-based compen-sation is deemed not to take into account the volume orvalue of referrals if the compensation is fair marketvalue for services or items actually provided and doesnot vary during the course of the compensation ar-rangement in any manner that takes into account refer-rals of DHS.18 Unit-based compensation is deemed notto take into account ‘‘other business generated between

the parties’’ if the compensation is fair market value forservices or items actually provided and does not varyduring the course of the compensation arrangement inany manner that takes into account referrals or otherbusiness generated by the referring physician, includ-ing private pay health care business.19

The statute allows compensation to be determinedbased on the volume or value of any referrals or otherbusiness only under certain physician incentive plans(PIP). To meet the PIP exception, no payments can bemade to induce the reduction or limitation of medicallynecessary services (see Chapter 2620, Underutiliza-tion and Quality of Care, for a discussion of theseincentive plans).

Fair Market Value. CMS at one point created a ‘‘safeharbor’’ provision in the definition of ‘‘fair market value’’for hourly payments to physicians for their personalservices.20 The safe harbor consisted of two methodolo-gies for calculating hourly rates that CMS would deemFMV for Stark law purposes. However, CMS laterabandoned these safe harbor methodologies in responseto complaints that they were impractical.21 To makeclear that its action in not retaining the safe harborwithin the FMV definition did not signal any agencylaxity regarding the FMV requirement, CMS cautionedthat it ‘‘will continue to scrutinize the fair market valueof arrangements as fair market value is an essentialelement of many exceptions.’’22

Holdovers. CMS states that a personal service ar-rangement which continues in effect beyond its statedterm (i.e., holdover) remains compliant with the per-sonal service arrangements exception for a period of upto six months following the expiration of the agreement,provided that the immediately preceding agreement ex-pired after a term of at least one year and the holdoverarrangement is on the same terms and conditions as theoriginal agreement.23 After six months, the partiesmust enter into a new, signed personal services agree-ment or renew the original agreement in writing.

Personal services arrangements must be examinedwith the anti-kickback law also in mind (see Chapter1415, Personal Services and Management Agree-ments).

2210.20.40Remuneration Unrelated to DHS

The exception for remuneration that is not related tothe provision of DHS 24 applies only to payments (i) to aphysician and (ii) by a hospital;25 it does not apply toremuneration from entities other than hospitals, nor topayments to a physician’s family members.

15 Social Security Act § 1877(e)(3)(A) [42 U.S.C. § 1395nn-(e)(3)(a)]. 42 C.F.R. § 411.357(d).

16 42 C.F.R. § 411.354(d)(1).17 Id.18 42 C.F.R. § 411.354(d).19 Id.

20 See Stark II interim final rule, Phase II, 69 Fed. Reg. 16123.21 Stark II final rule, Phase III, 72 Fed. Reg. at 51015; 42 C.F.R.

§ 411.354(d).22 Id.23 42 C.F.R. § 411.357(d)(1)(vii).24 Social Security Act § 1877(e)(4) [42 U.S.C. § 1395nn(e)(4)].25 42 C.F.R. § 411.357(g).



To fall within the exception, remuneration must be‘‘wholly unrelated’’ to the provision of DHS.26 This isnot the case if the DHS:

• is any item, service or cost that could be allocatedin whole or in part to Medicare or Medicaid underapplicable cost reporting principles;

• is given directly or indirectly, explicitly or implic-itly, in a selective, targeted, preferential, or conditionalmanner to medical staff or other physicians who are in aposition to make or influence referrals; or

• otherwise takes into account the volume or valueof referrals or other business generated by the refer-ring physician.

CMS has clarified that where there are no explicitcost reporting guidelines or requirements with respectto the allowability of a particular item, service, or cost sothat a hospital does not know, and could not reasonablybe expected to know, whether it can be allocated inwhole or in part to Medicare or Medicaid, CMS will notconsider the item, service, or cost to relate to the fur-nishing of DHS. CMS cautions, however, that the item,service, or cost still could be determined to be related tothe furnishing of DHS if, for example, it is furnished ina selective, targeted, preferential, or conditional man-ner to medical staff.27

A loan to a physician to finance the physician’s pur-chase of an interest in a limited partnership that ownsthe hospital would likely be construed as related to theprovision of DHS as would payments for malpracticeinsurance, medical devices, and remuneration given tomedical staff who are in a position to make referrals.Administrative and utilization review services wouldalso not be considered unrelated to DHS.

Finally, despite recognizing that covenants not tocompete are not necessarily equivalent to an obligationto make referrals, CMS said these agreements clearlyrelate to DHS and consequently, need to fall withinanother exception to be acceptable.28

One commentator has reported ‘‘informal’’ interpre-tations by CMS representatives that, to fall within theexception, payments must be made to physicians whohave neither medical staff membership nor clinicalprivileges at the hospital. Such a condition makes theexception practically useless, since it would apply onlyto the exceptional instance in which compensation ispaid to a physician who is not on the hospital staff, thecommentator said.29

2210.20.50Rental of Space or Equipment

The office space and equipment rental exceptions ap-ply to rents paid pursuant to space and equipment

leases, meaning any kind of bona fide lease arrange-ment, including capital leases.30 Like other compensa-tion arrangements, the lease payments must:

• be consistent with fair market value;

• not take into account the volume or value of anyreferrals or other business between the physician andhospital (or other DHS entity);

• be commercially reasonable in the absence of re-ferrals; and

• further the legitimate business purposes of theparties.

There must also be:

• a written lease for a term of at least one year thatspecifies the premises or equipment it covers;

• no sharing of the space or equipment by the lesseewith the lessor or any person or entity related to thelessor; and

• rent that is set in advance.31

For space rentals, the space cannot exceed that whichis reasonable and necessary for the legitimate businesspurposes of the lessee and must be used exclusively bythe lessee on a full-time basis, or if a part-time lease,while in its use. The lessee may, however, jointly usespace consisting of common areas if its rental paymentsdo not exceed the lessee’s pro rata share of expenses forthe space based on the ratio of the space used exclu-sively by the lessee to the total amount of space occu-pied by all persons using the common areas.

Termination of the lease with or without cause duringthe first year of the term does not cause the lease to failthe one-year term requirement, provided the parties donot enter into a new agreement during the originalterm.32 Holdovers that follow a lease agreement meet-ing all of the exception’s requirements are permitted forup to six months, provided the holdover rental is on thesame terms and conditions as the immediately preced-ing lease.33 Subleases also are permitted as long as thelessor does not share the rented equipment or spacewith the sublessee (meaning use them at the same time,or in lieu of the lessee).34

Sharing Arrangements. Office and equipment shar-ing arrangements do not typically meet the exception,given the requirement that the lessee have �exclusiveuse� of the leased space or equipment. This limitationeffectively requires that such leases be for set blocks oftime (i.e., ‘‘block leases’’).

Per Click Prohibition. The regulation governingrental of office space and equipment also prohibitsrental charges determined using a formula based on 1)a percentage of the revenue raised, earned, billed, col-lected, or otherwise attributable to the services per-formed or business generated in the office space or

26 Id.27 Stark II final rule, Phase III, 72 Fed. Reg. at 51057.28 69 Fed. Reg. at 16094.29 W. Bradley Tully, Federal Self-Referral Law § 2400.06.G.2

(BNA’s Health Law & Bus. Series, No. 2400).

30 Social Security Act § 1877(e)(1) [42 U.S.C. § 1395nn(e)(1)]; 42C.F.R. §§ 411.357(a)-(b).

31 42 C.F.R. §§ 411.357(a)-(b).32 42 C.F.R. § 411.357(a)(2).33 42 C.F.R. § 411.357(a)(3).34 Id.



through the use of the equipment; or 2) per-unit-of-service rental charges, to the extent that such chargesreflect services provided to patients referred by thelessor to the lessee.35 This limitation on per-click pay-ments applies whether the lessor is a physician or anentity in which the referring physician has an owner-ship or investment interest. It also applies where thelessor is a DHS entity that refers patients to a physicianor physician organization lessee (who refers patients tothe DHS entity for other DHS).36 CMS does not inter-pret the revisions as prohibiting a lessor from charginga lessee a pro rata share of expenses levied by a thirdparty (e.g., property taxes or utilities).37

Proving Market Value. A 2002 court decision in aFalse Claims Act case included a useful discussion of thefactors courts consider when assessing evidence of thefair market value of leased space. The case concernedan orthopedic treatment facility’s rental of office spacein a building owned by a group of doctors who referredpatients for such services. The court found the defen-dants’ evidence on fair market value credible and dis-missed the government’s allegations of anti-kickbackand Stark law violations.38

In assessing the evidence, the court said the govern-ment expert unduly restricted the geographic area heconsidered in searching for comparable buildings andalso failed to include any triple net leases (those underwhich the tenant pays taxes, insurance, and utilities)like the facility’s at issue. Furthermore, he made noadjustments for the unusual way in which the facility’ssquare footage was calculated (excluding common areasthe facility used and measuring from the inside of exte-rior walls). As a result, the government evidence wasunpersuasive, the court found.

The court also found that the orthopedic facility’sdemand for exclusivity and non-compete provisions, anda clause allowing it to break the lease if the physiciansever moved out of the building, did not indicate the leaserate was influenced by referrals. The purpose of thelatter clause was to avoid the problems the facility hadencountered with an off-site landlord at its previousleasehold, the court said. The court found the lease ratewas determined at arms’ length, with extensive nego-tiation of provisions over a long time, and that thefacility even withheld lease payments at one point be-cause of alleged poor maintenance. The court thereforeconcluded the government did not prove the health carefacility paid a higher rental rate in order to receiveMedicare patient referrals from the physician-owners.

2210.20.60Physician Recruitment

The Stark law allows payments associated with phy-sician recruitment under certain circumstances.39

The exception is intended to allow hospitals, federallyqualified health centers (FQHCs), and rural health clin-ics (RHCs)40 to make payments intended to induce aphysician to relocate his or her practice to the geo-graphic area served by the hospital and to become amember of the hospital’s medical staff. It also coversrecruiting payments made directly or indirectly to phy-sicians who are joining existing medical groups, pro-vided certain stringent conditions are met.41

Generally, in the case of an income guarantee for aphysician who is joining an existing practice, the prac-tice may only allocate costs to the recruited physicianthat do not exceed the actual incremental costs attrib-uted to the recruited physician. However, the regula-tions were recently revised to permit a group practice toallocate to the recruited physician a per capita alloca-tion of the practice’s aggregate overhead and otherexpenses, not to exceed 20 percent of the practice’saggregate costs, in certain limited situations in whichthe recruited physician is replacing a deceased, retiring,or relocating physician in a rural area or Health Profes-sional Shortage Area.42

The exception further prohibits a physician practicewith whom a recruited physician is joining from impos-ing practice restrictions. In 2007, CMS also acknowl-edged the potential negative effect on hospitals’ recruit-ment efforts if this provision categorically prohibitedphysician practices from imposing non-compete provi-sions on recruited physicians. The recruitment excep-tion therefore now only prohibits practice restrictionsthat ‘‘unreasonably restrict’’ the recruited physician’sability to practice medicine in the geographic areaserved by the hospital.43 According to CMS commen-tary, the following restrictions will not be viewed as�having a substantial effect on the recruited physician’sability to remain in the hospital’s geographic servicearea�44

• restrictions on moonlighting;

• prohibitions on soliciting patients and/or employ-ees of the physician practice;

• requiring that a recruited physician treat Medic-aid and indigent patients;

• requiring that a recruited physician not use confi-dential or proprietary information of the physicianpractice;

35 IPPS final rule FY 2009, 73 Fed. Reg. at 48710.36 IPPS final rule FY 2009, 73 Fed. Reg. at 48710, 48713-13.37 Id. at 48710-48711.38 United States ex rel. Goodstein v. McLaren Regional

Medical Center, No. 97-CV-72992-DT (E.D. Mich. Feb. 14, 2002);Court Dismisses Facility Kickback Case, Finds Lease NotAbove Fair Market Value, 6 BNA’s Health Care Fraud Rep. 189(March 6, 2002).

39 Social Security Act § 1877(e)(5) [42 U.S.C. § 1395nn(e)(5)].40 Stark II final rule, Phase III, 72 Fed. Reg. at 51048; 42 C.F.R.

§ 411.357(e)(6).41 42 C.F.R. § 411.357(e)(4).42 42 C.F.R. § 411.357(e)(4)(iii); Stark II final rule, Phase III, 72

Fed. Reg. at 51052.43 42 C.F.R. § 411.357(e)(4)(vi).44 Stark II final rule, Phase III, 72 Fed. Reg. at 51053.



• requiring the recruited physician to repay lossesof his/her practice that are absorbed by the physicianpractice in excess of any hospital recruitment pay-ments; and

• requiring the recruited physician to pay a prede-termined amount of reasonable damages (that is, liqui-dated damages) if the physician leaves the physicianpractice and remains in the community.

Any practice restrictions or conditions that do notcomply with applicable state and local law ‘‘run a sig-nificant risk of being considered unreasonable’’ byCMS. 45

CMS also confirmed that the written agreement be-tween the hospital and the recruited physician must besigned by the group practice if payments are beingindirectly or directly made to a physician who joins anexisting practice.46 Counterpart signatures are permis-sible.47 In addition, the recruitment exception does notprohibit a hospital from requiring a guaranty of therecruited physician’s repayment obligation from thepractice. CMS has warned, however, against the prac-tice of eliminating the physician’s obligation to reim-burse the practice should the hospital draw upon theguaranty, potentially creating a financial relationshipbetween the practice and the physician that would notmeet a Stark law exception.48

CMS has also clarified what kinds of expenses qualifyas recruitment expenses and which may be included inthe income guarantee. Depending on the circumstances,recruitment costs incurred could include:

• the actual costs of headhunter fees;

• airfare, hotel, meals, and other costs associatedwith visits by the recruited physician and his or herfamily to the relevant geographic area;

• moving expenses;

• telephone calls; and

• tail malpractice insurance covering the physician’sprior practice.49

The recruitment exception also requires the physi-cian to relocate his or her medical practice to the hos-pital’s geographic service area to become a member ofthe hospital’s medical staff. CMS has stated in commen-tary that a hospital that has granted a physician cour-tesy privileges to a physician may not rely on the re-cruitment exception with respect to that physician. 50

The physician recruitment exception requires thatthe recruited physician relocate his/her medical prac-

tice from outside to inside the ‘‘geographic area servedby the hospital.’’51 A recruited physician must relocatehis or her medical practice from outside the geographicarea into the area, and must also either (i) move the siteof his or her practice a minimum of 25 miles; or (ii)derive at least 75 percent of his or her practice’s rev-enues from services provided by the physician to newpatients (i.e., patients not seen at the physician’s formerpractice).52

During the initial start up year of the recruited phy-sician’s practice, the numerical requirement for newpatients will be satisfied if there is a reasonable expec-tation that the start up practice will derive at least 75percent of its revenues for the year from professionalservices to patients not treated by the physician at thephysician’s prior medical practice location during thepreceding three years.53

There is no explicit requirement in the physician re-cruitment exception that the recruited physician spend100 percent of his or her medical practice time in thegeographic area served by the hospital. CMS approvedan arrangement whereby a physician would spend 10percent to 20 percent of his or her time providing medi-cal services at a medical office not located in the hospi-tal’s geographic service area. It cautioned, however,that it might reach a different conclusion if the recruitedphysician spent more practice time outside the hospitalservice area.54

A hospital located in a rural area may determine itsgeographic service area using noncontiguous ZIP codesif the hospital draws fewer than 90 percent of its inpa-tients from all of the contiguous ZIP codes from which itdraws inpatients. For hospitals not located in rural ar-eas, a hospital’s geographic service area still must becomprised of the lowest number of contiguous ZIPcodes from which the hospital draws 75 percent of itsinpatients.55

CMS has advised that a hospital should look at itsinpatient data to determine where patients live and thencalculate the lowest number of ZIP codes that touch atleast one other ZIP code in which the inpatients reside.Recruited physicians may relocate a medical practiceinto a ‘‘hole’’ ZIP code area (i.e., a ZIP code area inwhich no inpatients reside) if that ‘‘hole’’ ZIP code areais surrounded by contiguous ZIP code areas from whichthe hospital derives 75 percent of its inpatients.56

It is possible for physicians to take advantage of therecruitment exception without meeting the relocation

45 Stark II final rule, Phase III, 72 Fed. Reg. at 51054.46 42 C.F.R. § 411.357(e)(4)(i).47 72 Fed. Reg. at 51051.48 Id. CMS has ruled that while the Stark law may not require

the use of an excess receipts provision (i.e. the repayment ofrecruitment dollars above a certain collection threshold), a con-tract containing one cannot be amended to remove one since thatmight lead to additional compensation for the already recruitedphysician. Centers for Medicare & Medicaid Servs., U.S. Dep’t of

Health & Human Servs., Advisory Op. No. CMS-AO-2007-01(September 2007).

49 72 Fed. Reg. at 51052.50 72 Fed. Reg. at 51048.51 42 C.F.R. § 411.357(e)(2).52 42 C.F.R. § 411.357(e)(2)(iv).53 Id.54 Centers for Medicare & Medicaid Servs., U.S. Dep’t of

Health & Human Servs., Advisory Op. No. CMS-AO-2006-01(Nov. 6, 2006).

55 42 C.F.R. § 411.357(e)(2)(i).56 Stark II final rule, Phase III, 72 Fed. Reg. at 51050-51051.



http://www.cms.gov/PhysicianSelfReferral/Downloads/CMS-AO-2007-01.pdf


requirement in a few limited circumstances. As long asthe recruited physician establishes his or her medicalpractice in the geographic area served by the hospital,the relocation requirement will not apply if, for at leasttwo years immediately prior to the recruitment ar-rangement, the recruited physician was employed on afull-time basis by:

• a federal or state bureau of prisons or similarentity (operating correctional facilities) to serve exclu-sively a prison population;

• the Department of Defense or Department of Vet-erans Affairs to serve active or veteran military person-nel and their families; or

• facilities of the Indian Health Service to servepatients who receive medical care exclusively throughthe Indian Health Service.57

The physician may not maintain an independent pri-vate practice for a two-year period while employed byone of the above entities. For example, CMS has saidthe relocation requirement should apply in the case of aphysician who left private practice in the hospital’s geo-graphic service area to become a full-time employee ofthe Indian Health Service for one year only.58 In addi-tion, CMS commentary has indicated that there may beother ‘‘rare’’ instances in which a hospital should bepermitted to provide recruitment assistance to a physi-cian whose practice cannot be relocated for some otherreason. Therefore, a recruited physician who estab-lishes a medical practice in the hospital’s geographicservice area will not be subject to the relocation provi-sion if the Secretary has deemed in an advisory opinionthat the physician does not have an established medicalpractice that serves or could serve a significant numberof patients who are or could become patients of therecruiting hospital.59

The recruitment exception excludes from the reloca-tion requirement medical residents and physicians whohave been in medical practice for less than one year. Aresidency includes all training, including post-residencyfellowships.60 Residents and physicians who have beenin medical practice less than one year will not be con-sidered to have an established practice and thereforewill be eligible under the physician recruitment excep-tion regardless of whether or not the physician actuallymoves his or her practice location.61

The recruitment exception does not protect the re-cruitment of mid-level non-physician practitioners.CMS has warned that under the ‘‘stand in the shoes’’doctrine, payments by a hospital to subsidize a grouppractice’s costs of recruiting and employing a non-phy-

sician practitioner would create a direct compensationarrangement between the hospital and the group prac-tice ‘‘for which no exception would apply.’’62

Physicians receiving recruitment assistance must beallowed to establish staff privileges at other hospitalsand to refer to other entities, except as such referralsmay be restricted under an employment agreement orStark compliant services agreement.63 However, rea-sonable credentialing restrictions on physicians becom-ing competitors of a hospital are permissible, so long asthey do not take into account the volume or value ofreferrals.64

Additionally, each arrangement must be set forth inwriting and signed by the parties.65 The arrangementmust not be conditioned on the physician’s referrals tothe hospital, nor can the hospital determine the amountof remuneration to the physician based on the volume orvalue of actual or anticipated referrals by the physicianor other business generated between the parties.66 Fi-nally, while documentation of community need is notrequired under this exception, such documentation maybe required by the Internal Revenue Service for tax-exempt hospitals and it is also considered important forcompliance with the Medicare anti-kickback statute.

2210.20.70Isolated Transactions

The isolated transaction exception covers one-timebusiness deals such as a property or practice sale be-tween a physician and a hospital to which the physicianmakes referrals. Transactions giving rise to any type offinancial relationship, not only those involving DHS, areaffected.67 Such isolated transactions will not be consid-ered compensation arrangements under Stark if certainconditions are met.68

To qualify for the exception, the amount of remunera-tion under the transaction must:69

• be consistent with fair market value;

• not be determined in a manner that takes intoaccount (directly or indirectly) the volume or value ofreferrals by the physician or other business generatedbetween the parties; and

• be commercially reasonable even if no referralsare to be made by the physician.

Additionally, no other transactions (except transac-tions specifically excepted under another exception) canoccur between the DHS entity and physician for sixmonths after an isolated transaction, except for com-mercially reasonable post-closing adjustments that do

57 42 C.F.R. § 411.357(e)(3).58 72 Fed. Reg. at 51048.59 42 C.F.R. § 411.357(e)(3)(iii).60 72 Fed. Reg. at 51051.61 42 C.F.R. § 411.357(e)(3).62 72 Fed. Reg. at 51049.63 42 C.F.R. § 411.357(e)(1)(iv).

64 Stark II interim final rule, Phase II, 69 Fed. Reg. at 16095;72 Fed. Reg. at 51049.

65 42 C.F.R. § 411.357(e)(1)(i).66 42 C.F.R. § 411.357(e)(1)(ii), (iii).67 Social Security Act § 1877(e)(6) [42 U.S.C. § 1395nn(e)(6)]; 42

C.F.R. § 411.357(f).68 Stark II, Phase II , 69 Fed. Reg. at 16098.69 Social Security Act § 1877(e)(6) [42 U.S.C. § 1395nn(e)(6)],

see also 42 C.F.R. § 411.357(f).



not take into account (directly or indirectly) the volumeor value of referrals.

Despite industry criticism of the six-month limit onpost-closing adjustments, CMS states that post-closingadjustments occurring after six months of closing willbe treated as new transactions that would have to sat-isfy the requirements of an exception. Adjustmentsbased on breach of warranty are part of the originaltransaction and may occur at any time, according toCMS; they are not considered either post-closing ad-justments or new transactions.70

With respect to separate transactions involving re-lated parties (e.g., a hospital’s purchase of both a medi-cal group practice and an office building owned by someof the physicians in the group), CMS views these as twoseparate transactions involving different parties, eachof which independently would have to meet the require-ments of the isolated transactions exception.71

Transactions involving long-term or installment pay-ments qualify for the exception if:

• the installment payment relates to a single trans-action;

• the total aggregate payment is fixed before thefirst installment payment is made;

• the total aggregate payment does not reflect thevolume or value of Medicare DHS referrals or otherbusiness generated by the physician for the DHS entity;and

• the payments are either immediately negotiable,guaranteed by a third party, secured by a negotiablepromissory note, or subject to a similar mechanism, toassure payment even in the event of default by thepurchaser or obligated party.72

With regard to the ‘‘immediately negotiable’’ noterequirement for installment payments, CMS has notedthat there are several options to meet the critical re-quirement that a mechanism be in place to ensure pay-ment in the event of default. If state law does not pro-vide for a ‘‘negotiable’’ promissory note, the parties arefree to choose from the other options.73

2210.20.80In-Office Ancillary Services

The Stark law allows physicians in group practices74

to refer within their practice for certain types of ser-vices that are a common part of a physician’s normalpractice.75 This ‘‘in-office ancillary services’’ exceptionsets out specific requirements for performance of theservice, for the location where the service is performed,and for billing the service.76 Generally, the servicesmust be performed or supervised by the referring phy-

sician or a ‘‘physician in the group practice,’’ provided inthe physician’s or group’s office, and billed by the phy-sician or the group.

The exception generally does not protect the provi-sion of durable medical equipment (DME), but doescover specified infusion pumps and canes, crutches,walkers, folding manual wheelchairs, and blood glucosemonitors that meet listed conditions. An arrangementfor listed DME also must comply with the anti-kickbackstatute.

Performance. Under the regulations, the servicesmust be performed personally by:77

• the referring physician;

• a physician who is a member of the same grouppractice as the referring physician; or

• individuals who are supervised by the referringphysician or by another physician in the same grouppractice. Supervision must comply with the level of su-pervision required under Medicare payment and cover-age rules applicable to the particular service.

Location. A service is ‘‘furnished’’ in the locationwhere the service is actually performed or where anitem is dispensed. The regulations also stipulate thatthe services must be furnished in one of the following:

• the ‘‘same building’’ (as defined in 42 C.F.R.§ 411.351) in which the referring physician, or anothermember of the same group practice, furnishes servicesthat meet one of three alternative tests;78

• a ‘‘centralized building’’ that is used by the grouppractice for the provision of all or some of the group’sclinical laboratory services; or

• a centralized building that is used by the grouppractice for the provision of some or all of the group’sDHS (other than clinical laboratory services).

Billing. The service must be billed by:79

• the physician performing or supervising the ser-vice;

• the group practice of which the performing orsupervising physician is a member, under a billing num-ber assigned to the group practice;

• the group practice if the supervising physician is‘‘a physician in the group practice’’ under a billing num-ber assigned to the group practice;

• an entity that is wholly owned by the physician orthe physician’s group practice under the entity’s ownbilling number or a number assigned to the physician orgroup practice; or

• an independent third party billing company actingas the group practice, physician, or entity agent, pro-vided the arrangement meets certain requirements.

70 Stark II final rule, Phase III, 72 Fed. Reg. at 51055.71 Id.72 42 C.F.R. § 411.351.73 Stark II final rule, Phase III, 72 Fed. Reg. at 51055.74 ‘‘Group practice’’ is defined in the statute at Social Security

Act § 1877(h)(4) [42 U.S.C. § 1395nn(h)(4)]. See also 42 C.F.R.§ 411.352. See Chapter 2215, Group Practices.

75 Social Security Act § 1877(b)(2) [42 U.S.C. § 1395nn(b)(2)].76 42 C.F.R. § 411.355(b).77 42 C.F.R. § 411.355(b)(1).78 42 C.F.R. § 411.355(b)(2)(i).79 42 C.F.R. § 411.355(b)(3).



A special rule for physicians who primarily treat pa-tients in their private homes allows these physicians,who do not actually practice in a building, to meet theexception’s building requirement.80

According to CMS, the exception does not alter anindividual’s or entity’s obligations under the rules re-garding reassignment of claims, purchased diagnostictests, payment for services and supplies incident to aphysician’s professional services, or any other appli-cable Medicare laws, rules, or regulations.81

Disclosure to Patients. Under provisions of the Pa-tient Protection and Affordable Care Act (PPACA)passed March 23, 2010, and effective that date, physi-cians relying on the in-office ancillary exception arerequired to provide their patients, at the time of thereferral, with a written statement that the patient mayobtain the prescribed service from another physician orsupplier outside of that physician’s group practice.82

This disclosure requirement applies only to the follow-ing advanced imaging services: MRI, CT, and PET.Among other requirements, the physician must providea list of five suppliers that are located within 25 miles ofthe physician’s office (or all the suppliers, if there arefewer than five in a rural area).83 In commentary to thefinal rule, CMS clarified that the disclosure to the pa-tient does not have to include the distance from thephysician’s office; the physician does not have to keep asigned patient acknowledgement on file (though CMSnoted that as a general compliance matter some sort ofdocumentation should probably be maintained); mailingor emailing the disclosure is acceptable, if verbal notifi-cation has occurred; and the physician is not prohibitedfrom including language stating that its list of othersuppliers is not an endorsement or recommendation ofthose suppliers.84

The key guidelines for the disclosure are that it mustbe reasonably understood by all patients; be given atthe time of referral; include the name, address andphone number of the other suppliers; list suppliers whoare able to perform the needed test, based on the phy-sician’s ‘‘reasonable effort’’ to compile the list; and beupdated once a year. CMS clarified that the disclosuremust be given at the time of each referral, not just forthe initial service for the patient.85

For more information on the in-office ancillary ser-vices exception, see Chapter 2215, Group Practices,§ 2215.20.40.

2210.20.90Academic Medical Centers

The academic medical center (AMC) exception pro-tects referrals for services provided by an academic

medical center when specified conditions are met.86 Thereferring physician must:

• be a bona fide employee, on a full-time or substan-tial part-time basis, of a ‘‘component’’ of the academicmedical center;

• be licensed to practice medicine in the state, andhave a bona fide faculty appointment at the affiliatedmedical school or ‘‘accredited academic hospital.’’87

• provide either substantial academic or substantialclinical teaching services for which the physician is paidas part of the employment relationship.

‘‘Component’’ of an academic medical center meansan affiliated medical school, faculty practice plan, hos-pital, teaching facility, institution of higher education,departmental professional corporation, or nonprofitsupport organization whose primary purpose is sup-porting the teaching mission of the AMC. The compo-nents need not be separate legal entities.

Physician compensation must meet the following re-quirements:88

• the total compensation paid by each AMC compo-nent to the referring physician must be set in advance;

• the aggregate compensation paid by all AMCcomponents to the faculty physician does not exceed fairmarket value for the services provided; and

• the total compensation paid by each AMC compo-nent to the faculty physician must not be determined ina manner that takes into account the volume or value ofany referrals or other business generated by the refer-ring physician within the AMC.

For purposes of this exception, the compensation paidby each individual AMC component to a faculty physi-cian need not be consistent with fair market value. (Forother regulatory purposes, the component may want toensure that such compensation reflects fair marketvalue.) The aggregate compensation paid by all AMCcomponents to that faculty physician must, however, beconsistent with fair market value.89

Finally, the academic medical center must meet thefollowing conditions:90

• all transfers of money between components of theAMC must directly or indirectly support the missions ofteaching, indigent care, research, or community service;

• relationships of the components must be set forthin written agreements or other written documents thathave been adopted by the governing body of each com-ponent (if the AMC is one legal entity, this requirementwill be satisfied if transfers of funds between compo-nents of the AMC are reflected in the routine financialreports covering the components);

80 42 C.F.R. § 411.355(b)(6).81 Stark II final rule, Phase III, 72 Fed. Reg. at 51032-51035.82 Social Security Act 1877(b)(2)[42 U.S.C. § 1395nn(b)(2)].83 42 C.F.R. § 411.355(b)(7).84 75 Fed. Reg. 73169, 73443-47 (Nov. 29, 2010).85 Id.

86 Stark II final rule, Phase I, 66 Fed. Reg. at 915; 42 C.F.R.§ 411.355(e).

87 Defined at 42 C.F.R. § 411.355(e)(2).88 42 C.F.R. § 411.355(e)(1)(ii).89 Stark II final rule, Phase III, 72 Fed. Reg. at 51037.90 42 C.F.R. § 411.355(e)(1)(iii).



• all money paid to a referring physician for re-search must be used solely to support bona fide re-search and must be consistent with the terms and con-ditions of the grant; and

• the referring physician’s compensation arrange-ment must comply with the anti-kickback statute and alllaws and regulations governing billing and claims sub-mission.

The academic medical center, for purposes of theStark exceptions, consists of:

• an accredited medical school, including a univer-sity or an accredited academic hospital when appropri-ate;

• one or more faculty practice plans affiliated withthe medical school, the affiliated hospital(s), or the ac-credited academic hospital; and

• one or more affiliated hospitals in which both amajority of the medical staff consist of faculty physi-cians, and a majority of all hospital admissions are madeby faculty physicians.91

The regulation provides that any faculty membermay be counted, including courtesy and volunteer fac-ulty, in determining whether the majority tests aremet.92 However, payments to such volunteer faculty arenot permitted under this exception, given the require-ment that the referring physician be a bona fide em-ployee (at least on a substantial part-time basis) of acomponent of the AMC. Such payments must qualifyunder another exception.

An affiliated hospital may exclude a particular class ofprivileges when determining whether it satisfies thetest as to whether a majority of the medical staff con-sists of faculty physicians, but in doing so, it must ex-clude all individual physicians with the same class ofprivileges. In other words, if the hospital wishes toexclude certain members of its courtesy staff, then itmust exclude all members of the courtesy staff for pur-poses of the calculation.93

Regulations no longer require AMCs to have an ac-credited medical school to be a component of the AMC.Rather, a teaching hospital may be the only componentof the AMC to provide teaching and education if itmeets the requirements of an ‘‘accredited academic hos-pital,’’ that is, a hospital or health system that sponsorsfour or more approved medical education programs.94

Only one case to date has construed the Stark aca-demic medical center exception.95 In that case, the gov-ernment alleged that an arrangement in which a hospi-tal made payments to referring pediatric cardiologiststhrough their university employer did not satisfy theAMC exception to Stark. The court adopted a ‘‘goal and

purpose-oriented perspective rather than a hyper-tech-nical one’’ and found that the applicable party compliedwith the AMC exception.

2210.20.100Non-Monetary Compensation

An exception for certain forms of non-monetary com-pensation might cover situations in which physicians ortheir immediate family members receive compensationfrom a hospital that is not part of a formal, writtenagreement.96 For example, a physician might receivefree training sessions for his or her staff before per-forming services for hospital patients, or training ses-sions that are not considered part of an existing agree-ment for services. A hospital also might furnish thephysician with free coffee mugs or note pads. The ex-ception allows the receipt of such compensation, pro-vided that:

• the compensation received is in the form of non-cash items or services and does not include cash equiva-lents, such as gift certificates, stocks or bonds, or airlinefrequent flier miles;

• the gifts are valued in the aggregate at no morethan the amount set annually by CMS;97 and

• the compensation is not determined in a way thattakes into account the volume or value of the physician’sreferrals or other business generated by the referringphysician; and

• the compensation was not solicited by the physi-cian or the physician’s practice (including employees orstaff members).

Finally, this compensation likewise must not violatethe anti-kickback statute or any laws or regulationsgoverning billing or claims submission.

Notably, this exception protects gifts to individualphysicians only, and not gifts given to a group practice.For example, it does not apply to gifts such as holidayparties or office equipment, even if such gifts, in theaggregate, are not greater than the allowed amount perphysician in the group, multiplied by the number ofphysicians in the group.98 Because of this exception,hospitals may give small gifts and benefits, such asmeals or gift baskets, to referring physicians. Hospitalsshould, however, also track these free items and ser-vices to ensure that they do not, in the aggregate, ex-ceed the allowable amount per physician.

When a hospital has inadvertently exceeded the non-monetary compensation limit by no more than 50 per-cent, physicians can repay certain excess nonmonetarycompensation within the same calendar year to pre-serve compliance with the Stark law. The physician whoreceives the compensation must return the excess

91 42 C.F.R. § 411.355(e)(2)(iii).92 Id.93 42 C.F.R. § 411.355(e)(2)(iii). Stark II final rule, Phase III, 72

Fed. Reg. at 51037.94 42 C.F.R. § 411.357(e)(3).

95 United States ex rel. Villafane v. Solinger, 543 F. Supp. 2d678 (W.D. Ky. 2008).

96 42 C.F.R. § 411.357(k).97 For CY 2012, for example, this value is set at $373. See the

Consumer Price Index-Urban All Item table promulgated byCMS.

98 Stark II final rule, Phase I, 66 Fed. Reg. at 921.



http://www.cms.gov/PhysicianSelfReferral/50_CPI-U_Updates.asp

amount by the earlier of (i) the end of the calendar yearin which he or she receives it, or (ii) 180 consecutivecalendar days from receipt. This provision can only beused by a hospital once every three years with respectto the same referring physician.99 Finally, the exceptionalso allows entities, without regard to the dollar limita-tion in 42 C.F.R. § 411.357(k)(1), to provide one medicalstaff appreciation function (such as a holiday party) forthe entire medical staff per year. Any gifts or gratuitiesprovided in connection with the event must, however,fall within the noncompensation monetary limits.

2210.20.110Fair Market Value Compensation

The regulatory fair market value (FMV) compensa-tion exception, provides that compensation resultingfrom an arrangement between an entity and a physicianor group of physicians for the provision of items orservices (other than the rental of office space) will notconstitute a financial relationship if the arrangement isset forth in an agreement that meets the following con-ditions:100

• is for identifiable items or services that are speci-fied in a written agreement signed by the parties;

• specifies the time frame for the arrangement,which can be for any period of time and contain a ter-mination clause, provided the parties enter into only onearrangement for the same items or services during thecourse of a year (an arrangement made for less than ayear may be renewed any number of times if the termsof the arrangement and the compensation for the sameitems or services do not change);

• specifies the compensation under the arrangement(compensation must be set in advance; be consistentwith fair market value; not be determined in a mannerthat takes into account the volume or value of any re-ferrals or any other business generated by the referringphysician;

• involves an arrangement that is commercially rea-sonable and furthers the legitimate business purposesof the parties;

• does not violate the anti-kickback statute, and

• is for services that do not involve the counseling orpromotion of a business arrangement or other activitythat violates a state or federal law.

The FMV exception may be used in certain instanceswhen another exception, such as the personal servicesexception, also applies.101 Because the personal servicesarrangements exception requires that agreements befor a term of at least a year, the FMV exception givesparties greater flexibility in structuring arrangements.Notably, however, under either exception, compensation

cannot be changed during the first year for the sameitems and services.

The FMV exception explicitly does not apply, how-ever, to the rental of office space.102

Although this exception previously applied only topayments by an entity to a referring physician or agroup of physicians for items and services, it was re-cently expanded to cover payments by a physician or agroup of physicians to an entity for items and ser-vices.103

This expansion has the side effect of potentially vastlynarrowing a different Stark law exception—the ‘‘pay-ments by a physician’’ exception. The ‘‘payments by aphysician’’ exception requires only that the compensa-tion paid by the physician (or his or her immediatefamily member) to an entity be at a price consistent withFMV. The ‘‘payments-by-a-physician’’ exception, how-ever, only protects payments for items or services ‘‘notspecifically excepted by another’’ Stark law excep-tion.104

2210.20.120Incidental Medical Staff Benefits

Stark contains an exception for certain incidentalbenefits of low value provided by hospitals to their medi-cal staffs.105 The exception was created to permit thetypes of customary industry business practices thatbenefit both hospitals and their patients. For example, ahospital might provide free Internet access to physi-cians to facilitate access to hospital medical records orinformation.

The exception covers compensation in the form ofitems or services, not including cash or cash equiva-lents, from a hospital (or other DHS entity with a bonafide medical staff)106 to its medical staff, provided thecompensation arrangement does not violate the anti-kickback statute and the compensation is:

• offered by a hospital to all members of the medicalstaff in the same specialty without regard to the volumeor value of referrals or other business generated be-tween the parties;

• except with respect to identification of medicalstaff on a hospital website or in hospital advertising, thecompensation is provided only during periods when themedical staff members are making rounds or perform-ing other duties that benefit the hospital or its patients;

• provided by the hospital and used by the medicalstaff members only on the hospital’s campus (Internetaccess, pagers, and two-way radios, used away from thecampus only to access the hospital are considered tomeet the ‘‘on campus’’ requirement);

99 Stark II final rule, Phase III, 72 Fed. Reg. at 51058-51059; 42C.F.R. § 411.357(k)(3).

100 42 C.F.R. § 411.357(l).101 Stark II final rule, Phase I, 66 Fed. Reg. at 919.

102 Stark II final rule, Phase III, 72 Fed. Reg. at 51059.103 Stark II final rule, Phase III, 72 Fed. Reg. at 51057.104 42 C.F.R. § 411.357(i)(2).105 42 C.F.R. § 411.357(m).106 42 C.F.R. § 411.357(m)(8).



• reasonably related to the provision of, or designedto facilitate directly or indirectly the delivery of, medicalservices at the hospital;

• of low value107 (adjusted for inflation annually)with respect to each occurrence of the benefit; and

• not determined in any manner that takes into ac-count the volume or value of referrals or other businessgenerated between the parties.

CMS explicitly said that medical transcription ser-vices, a commonly provided service at many hospitals,do not meet the exception’s requirements.108

Incidental benefits must be used exclusively on thehospital’s campus as noted above or for patients on thehospital’s campus. For example, a hospital may providea physician with a device used to access patients andpersonnel on the hospital’s campus, even if the physi-cian is not on the campus, but the device may not beused to access patients or personnel in other locations.According to CMS, a hospital campus consists of ‘‘allfacilities operated by a hospital except for facilities thathave been leased for non-hospital purposes and are notused exclusively by the hospital.’’109

2210.20.130Physician Compliance Training

The Stark regulations also contain an exception forcompliance training provided by a hospital (or otherDHS entity) to a physician (or his or her immediatefamily member or office staff) if the physician practicesin the hospital’s local community or service area, pro-vided the training is held in that same local communityor service area.110 ‘‘Compliance training’’ is trainingregarding the basic elements of a compliance pro-gram—for example, establishing policies and proce-dures, staff training, and internal monitoring—or spe-cific training regarding the requirements of federalhealth care programs—billing, coding, documentation,etc. See Chapter 207, Compliance Program Basics.The rule does not limit training to hospital-related ser-vices, and could allow hospital-funded compliance train-ing relating to private physician practice, as well. Itspecifically allows compliance training for any federal,state, or local law, regulation, or rule that in any waygoverns the conduct of the party receiving training andis not limited to training for government benefits pro-grams.111

The exclusion also covers compliance programs thatqualify as Continuing Medical Education as long ascompliance training predominates. CMS has clearly

stated, however, that the primary purpose of the pro-gram must be to provide compliance training and that‘‘traditional CME content under the guise of ‘compli-ance training’ ’’ will not be protected under this excep-tion.112 While perhaps a minor change, this provisionappears to indicate that CMS understands that theslight increased risk of program abuse is outweighed bythe possibility of increased attendance and improvededucational opportunities for compliance programs un-der this revised exception.

2210.20.140Indirect Compensation Arrangements

If an indirect compensation arrangement is found toexist (see Chapter 2220, Direct and Indirect Relation-ships), DHS referrals are prohibited unless the ar-rangement fits within a compensation exception thatprotects such relationships. The indirect compensationexception will most frequently be applied for this pur-pose. The exception has three elements:113

• the compensation received by the physician or im-mediate family member is fair market value for servicesor items actually provided, not taking into account thevalue or volume of referrals or other business generatedby the referring physician for the entity furnishingDHS;

• The agreement is set out in writing, signed by theparties,114 and specifies the services covered by thearrangement, except in the case of a bona fide employ-ment arrangement between an employer and an em-ployee, in which case the arrangement need not bewritten, but must be for identifiable services and mustbe commercially reasonable, even if no referrals aremade to the employer.

• The compensation arrangement does not violatethe anti-kickback statute or any laws or regulationsgoverning billing or claims submission.

Effective Oct. 1, 2009, lease payments for office spaceor equipment may not be based on either a percentageof revenue raised, earned, billed, collected or otherwiseattributable to the services performed or business gen-erated in the space or through use of the equipment, orper-unit rental charges, to the extent that such chargesreflect services for patients referred by the lessor to thelessee.

‘‘Stand in the Shoes’’ Doctrine. Amendments to thedefinition of ‘‘compensation arrangement’’ in 2007 and2008 substantially changed the analysis and determina-

107 For CY 2012, for example, this value was set at $31. See theConsumer Price Index-Urban All Item table promulgated byCMS.

108 Stark II final rule, Phase I, 66 Fed. Reg. at 921.109 Stark II final rule, Phase III, 72 Fed. Reg. at 51060.110 42 C.F.R. § 411.357(o).111 Id.112 Stark II final rule, Phase III, 72 Fed. Reg. at 51061.113 42 C.F.R. § 411.357(p).

114 All physicians in a physician organization need not sign. Seen.152 - n.156 infra. CMS will consider a physician who is standingin the shoes of his or her physician organization to have signed awritten agreement memorializing a compensation arrangementwhen the authorized signatory of the physician organization hassigned the agreement. This rule applies to all compensation ex-ceptions. Centers for Medicare & Medicaid Servs., U.S. Dep’t ofHealth & Human Servs., Payment Policies Under the PhysicianFee Schedule and Other Revisions to Part B for CY 2010, 74 Fed.Reg. 61738 (Nov. 25, 2009) (final rule with comment period).



http://www.cms.gov/PhysicianSelfReferral/50_CPI-U_Updates.asp

tion as to whether a financial relationship between anentity and a referring physician is direct or indirect.115

Under revised 42 C.F.R. § 411.354(c), effective sinceOctober 1, 2008, a physician ‘‘stands in the shoes’’(SITS) of his or her physician organization and isdeemed to have a direct financial arrangement with theDHS entity, if (i) the only intervening entity betweenthe physician and entity furnishing DHS is his or herphysician organization and (ii) he or she has a non-titular ownership interest in the physician organization.

A ‘‘physician organization’’ is defined as a physician(including a professional corporation of which the phy-sician is the sole owner), a physician practice, or a grouppractice as defined under Stark.116 A titular ownershipor investment interest is one that excludes the ability orright to receive the financial benefits of ownership orinvestment, including, but not limited to, the distribu-tion of profits, dividends, proceeds of sale, or similarreturns on investment.

If SITS applies, the physician is deemed to have adirect relationship with the DHS entity on the sameterms as the arrangement between the physician orga-nization and the DHS entity. In other words, his or herphysician organization is no longer considered to be an‘‘intervening entity’’ and many arrangements that werepreviously analyzed as indirect are now deemed to bedirect compensation arrangements. Therefore, such ar-rangements must meet a direct exception; they are nolonger analyzed under the three-part indirect compen-sation relationship definition or by the indirect compen-sation exception. There was, however, a limited grand-fathering clause for the original term or current re-newal term of any arrangement that met therequirements of the indirect compensation exception asof September 5, 2007.117

Notably, for the time period between December 4,2007 and October 1, 2008, the SITS rules applied to alarger category of physicians, as they also covered re-ferring physicians who were employees or independentcontractors of their physician organizations (not justphysicians who were non-titular owners). Accordingly,referring physician owners, employees, and indepen-dent contractors were all required to ‘‘stand in theshoes’’ of their physician organizations for that period oftime. Accordingly, almost all arrangements between re-ferring physicians affiliated with physician organiza-tions and hospitals became direct for that period oftime. The grandfathering provision for the original orcurrent renewal term of any arrangement meeting theindirect compensation exception as of September 5,

2007, however, covered a number of these arrange-ments.

Furthermore, CMS delayed the effective date ofthese ‘‘stand in the shoes’’ provisions until December 4,2008 for compensation arrangements between a facultypractice plan and another component of the same aca-demic medical center, as defined by Stark, and for com-pensation arrangements between an affiliated DHS en-tity and an affiliated physician practice in the sameintegrated 501(c)(3) health care system. Accordingly,these arrangements were not subject to the SITS rulesbetween December 4, 2007 and October 1, 2008.118

2210.20.150Risk-Sharing Arrangements

CMS created the risk-sharing compensation excep-tion in 2004 to avoid having Stark disrupt the variouskinds of physician arrangements with managed careorganizations that treat Medicare beneficiaries; the ex-isting statutory prepaid plan exception did not previ-ously protect many of these financial arrangements.119

The risk-sharing compensation exception protectscommercial and employer-provided managed care ar-rangements using incentive compensation such as with-holds, bonuses, and risk pools that would not be pro-tected by either the employment or personal servicesexceptions.

The exception states that compensation for servicesprovided to enrollees of a health plan pursuant to suchrisk-sharing arrangements does not constitute a finan-cial relationship for purposes of Stark, provided thearrangement does not violate the anti-kickback statuteor any law or regulation governing billing or the sub-mission of claims.120

CMS defines ‘‘health plan’’ in the same manner as theanti-kickback safe harbor,121 The regulation does notdefine ‘‘risk-sharing,’’ however CMS’s commentary122

makes clear that, for Stark purposes, the agency inter-prets the term more broadly than it does for purposes ofthe anti-kickback risk-sharing safe harbors.123 CMS hassaid that this exception covers all risk-sharing compen-sation paid to physicians by any downstream entity, aslong as the terms of the exception are met.124

2210.20.160Professional Courtesy/Intra-Family RuralReferrals

This compensation exception exempts free or dis-counted health care items or services (‘‘professionalcourtesy’’) offered by an entity to a referring physicianor a physician’s immediate family member or office

115 Stark II final rule, Phase III, 72 Fed. Reg. at 51027-51028.116 See 42 C.F.R. § 411.351.117 42 C.F.R. § 411.354(c)(3)(ii).118 Delay of the Date of Applicability for Certain Provisions of

Physicians’ Referrals to Health Care Entities With Which TheyHave Financial Relationships (Phase III), 72 Fed. Reg. 64161(Nov. 15, 2007).

119 The Stark II interim final rule, Phase II, amended theprepaid plans exception at 42 C.F.R. § 411.356(c) to cover Medic-aid managed care plans. See, 69 Fed. Reg. at 16056.

120 42 C.F.R. § 411.357(n).121 42 C.F.R. § 1001.952(l)(2).122 Stark II final rule, Phase I, 66 Fed. Reg. at 912.123 Id.124 Stark II interim final rule, Phase II, 69 Fed. Reg. at 16114.



staff. This common and long-standing practice, wherebythe DHS entity furnishes medical services at no orreduced cost, is permitted where:

• the courtesy is offered to all physicians on theentity’s bona fide medical staff or in such entity’s localcommunity or service area without regard to the volumeor value of referrals or other business generated be-tween the parties;

• the health care items and services provided are ofa type routinely provided by the DHS entity;

• the entity has a professional courtesy policy that isset out in writing and approved in advance by the enti-ty’s governing body;

• the professional courtesy is not offered to a physi-cian (or immediate family member) who is a federalhealth care program beneficiary, unless there has been agood faith showing of financial need; and

• the arrangement does not violate the anti-kick-back statute or any federal or state law or regulationgoverning billing or claims submission.125

The exception does not protect professional courtesyprovided by suppliers, such as laboratories or DMEsuppliers, but only that by hospitals and other providerswith a formal medical staff. An entity is no longer re-quired under Stark to notify an insurer when the pro-fessional courtesy involves a reduction of any coinsur-ance obligation (insurers may require such notification).

Intra-Family Rural Referrals. A regulatory excep-tion permits physicians to refer patients living in a ruralarea to his or her immediate family member or an entityin which his or her immediate family member has eitheran ownership or compensation interest, provided thefollowing requirements are met: (i) the patient who isreferred lives in a rural area as defined by Stark, (ii)there is no other person or entity available to furnishthe services in a timely manner within 25 miles or 45transportation minutes of the patient’s home, and (iii) inthe case of services furnished to patients where theyreside (for example, home health services or DME), noother person or entity is available to furnish the ser-vices in a timely manner considering the patient’s con-dition. The referring physician or the immediate familymember must make reasonable inquiries as to the avail-ability of other persons or entities to furnish DHSwithin 25 miles or 45 transportation minutes of thepatient’s home.126

In theory, a referring physician could avail him- orherself of the exception even if the physician and theDHS entity were both located in an urban area.127 Un-like other location-based exceptions, this exception is

based on where the patient resides, rather than thelocation of either the referring physician or the DHSentity.128

Since this provision is the only one that excepts some,but not all, patients referred to an entity by a particularphysician, providers who use this exception shouldclearly distinguish between patients who qualify for theexception and those who do not. They should also tracktheir patients’ rural or urban geographical classifica-tion, and stay abreast of any regulatory changes todefinitions of urban and rural boundaries. CMS hasclarified that Micropolitan Statistical Areas, not beingconsidered urban, are rural areas.129

To the extent that the only person or entity that canfurnish DHS to the beneficiary within 25 miles or 45minutes transportation time from the patient’s resi-dence does not participate in Medicare, such an entity‘‘should be treated as if it does not exist,’’ CMS said.130

2210.20.170Physician Services

The physician services statutory exception requiresthat physician services be provided either personally byanother physician group member or physician in thesame group practice, or under the supervision of an-other group member physician or physician in the grouppractice.131 The exception applies only to physician ser-vices and to ‘‘incident to’’ services that qualify as phy-sician services.

2210.20.180Referral Services/Malpractice Insurance

Remuneration resulting from any arrangement thatmeets all the conditions set forth in the anti-kickbacksafe harbor for referral services,132 or the safe harborfor obstetrical malpractice insurance subsidies,133 is ex-cepted from the self-referral prohibition.134

Effective October 1, 2008, CMS has also provided analternative set of requirements for the obstetrical mal-practice insurance subsidy exception. The new require-ments were set forth in response to criticisms that,under the prior rule, even an agreement that received afavorable advisory opinion from the OIG as to the anti-kickback statute, despite not fitting within the anti-kickback safe harbor, would fail to satisfy the Starkrequirement to meet all the conditions set forth in thesafe harbor. The new requirements allow hospitals, fed-erally qualified health centers, and rural health clinicsto provide an obstetrical malpractice insurance subsidyto a physician who regularly engages in obstetricalpractice as a routine part of a medical practice that is (i)

125 42 C.F.R. § 411.357(s).126 42 C.F.R. § 411.353(j).127 Thomas S. Crane, Esq., Mintz, Levin, Cohn, Ferris, Glovsky

and Popeo P.C., et. al., Stark Phase II Final Rule: Summaryand Analysis (Mintz, Levin Analysis), 8 BNA’s Health CareFraud Rep. 320 (April 14, 2004).

128 Stark II interim final rule, Phase II, 69 Fed. Reg. at 16084.

129 Stark II final rule, Phase III, 72 Fed. Reg. at 51040, citing65 Fed. Reg. 82228-82233 (Dec. 27, 2000).

130 Stark II final rule, Phase III, 72 Fed. Reg. at 51040.131 Social Security Act § 1877(b)(1) [42 U.S.C. § 1395nn(b)(1)].

See also, Stark II final rule, Phase I, 66 Fed. Reg. at 879; 42 C.F.R.§ 411.355(a).

132 42 C.F.R. § 1001.952(f).133 42 C.F.R. § 1001.952(o).134 42 C.F.R. §§ 411.357(q) and 411.357(r), respectively.



located in a primary care health professional shortagearea, rural area, or area with a demonstrated need, asdetermined by HHS in an advisory opinion; or (ii) iscomprised of patients at least 75 percent of whom residein a medically underserved area or are part of a medi-cally underserved population.135

The arrangement must be set out in writing, signed,and specify the payments to be made. The arrangementcannot be conditioned on the physician’s referral ofpatients to the entity providing the payment, and thepayment cannot be determined, directly or indirectly,based on the volume or value of actual or anticipatedreferrals by the physician or other business generatedby the parties. The physician must be allowed to estab-lish staff privileges at any entity and to refer business toany other entities (unless a directed referral require-ment complies with 42 C.F.R. § 411.354(d)(4)). The phy-sician must treat obstetrical patients in a nondiscrimi-natory manner, and payments must be made to a personor organization providing the malpractice insurance.The insurance must be a bona fide malpractice insur-ance policy or program and the premium calculatedbased on a bona fide assessment of the liability riskunder the insurance. There are additional requirementsregarding the patients treated under the policy or pro-gram.136

2210.20.190Retention Payments (Underserved Areas)

Money paid to a physician in order to retain thephysician in a hospital or FQHC service area are ex-cepted from the self-referral prohibition if several con-ditions are met. 137 Unlike the recruitment exception,the retention exception does not permit payments to bemade to a physician indirectly through a medical grouppractice.

Retention payments may only be made to a physicianif either (i) 75 percent of the physician’s patients residein a medically underserved area or are members of amedically underserved population, or (ii) if the physi-cian’s current medical practice is located in a rural area,a health professional shortage area (HPSA), regardlessof physician specialty, or an area with a demonstratedneed for the physician (as determined in an advisoryopinion). Furthermore, the hospital can only enter intoone retention arrangement with a particular referringphysician every 5 years. The amount and terms of thearrangement cannot take into account the volume orvalue of referrals, or other business generated by thephysician.138

The following conditions must also be met:

• the physician has a firm written recruitment oremployment offer,139 from another hospital, academicmedical center, physician organization, or FQHC inde-

pendent of the entity seeking to retain the physician,which would require the physician to move his or herpractice at least 25 miles and out of the current hospi-tal’s service area (CMS may waive, through an advisoryopinion, the relocation requirement for a physicianpracticing in a HPSA or other underserved area);

• the amount of the retention payment is limited tothe lower of (i) the difference between the physician’scurrent income from physician and related services andthe income being offered in the recruitment or employ-ment proposal, with each calculated over no more than a24-month period using the same methodology, or (ii) thereasonable costs the hospital or FQHC must expend torecruit a replacement physician.

In addition, in certain circumstances, retention pay-ments are permitted to be made to a physician who doesnot have a bona fide written recruitment or employmentoffer. The physician must certify that he or she has abona fide opportunity for future employment that wouldrequire the physician to relocate his or her medicalpractice at least 25 miles and outside of the geographicarea served by the hospital or FQHC (which is the samerequirement applicable to a written recruitment or em-ployment offer). Payment in this case is limited to thelower of either the reasonable costs the hospital orFQHC must expend to recruit a replacement physicianor 25 percent of the physician’s current income (mea-sured over no more than a 24 month period).140

2210.20.200Community-Wide Health Information Systems

A hospital or other DHS entity may furnish physi-cians with information technology as part of acommunity-wide health information system withoutcreating a financial relationship under the Stark law.141

The following requirements must be met:

• the items or services are provided and utilizedprimarily to allow access to a community-wide networkof health information such as medical records, comple-mentary drug information systems, general health in-formation, medical alerts, and related patient treatmentinformation;

• provision of the information system does not takeinto account the volume or value of referrals or violatethe anti-kickback statute; and

• the system is available to all providers, practitio-ners, and residents of the community who wish to par-ticipate.

2210.20.210Electronic Prescribing Systems

The Medicare Prescription Drug, Improvement, andModernization Act of 2003 (MMA) added a new Part Dto the Social Security Act establishing a prescription

135 42 C.F.R. § 411.357(r)(2).136 42 C.F.R. § 411.357(r)(2)(ix).137 42 C.F.R. § 411.357(t).138 42 C.F.R. § 411.357(t)(3).

139 Such offers must specify the remuneration being offered.See 42 C.F.R. § 411.357(t).

140 42 C.F.R. § 411.357(t)(2).141 42 C.F.R. § 411.357(u).



drug benefit in the Medicare program.142 As part of thenew legislation, Congress directed the secretary of theDepartment of Health and Human Services to create aStark law exception to protect arrangements involvingthe provision of non-monetary remuneration (items andservices in the form of hardware, software, or informa-tion technology and training services) necessary andused solely to receive and transmit electronic prescrip-tion drug information in accordance with electronic pre-scribing standards adopted by HHS.

In 2006, CMS published regulations laying out therules for this exception.143 At the same time, the HHSOffice of Inspector General (OIG) issued a comparablesafe harbor under the anti-kickback statute (see Chap-ter 1805, Hospital Incentives to Physicians,§ 1805.20.50). Both the exception and the safe harborare effective Oct. 10, 2006. A similar exception, whichmay have more utility, promulgated at the same timecovers electronic health records (see § 2210.20.220.)

The regulations provide that electronic prescribingtechnology is excepted from the self-referral prohibi-tion if several conditions are met:144

• the items and services are provided 1) by a hospi-tal to a physician who is a member of its medical staff, 2)by a group practice145 to a prescribing health care pro-fessional who is a member146 of the group practice; or 3)by a prescription drug plan sponsor or Medicare Advan-tage organization to pharmacists and pharmacies par-ticipating in the network of such sponsor or organiza-tion and to prescribing health care professionals;

• the items and services are part of, or are used toaccess, an electronic prescription drug program thatmeets standards under Medicare Part D applicable atthe time the items and services are provided;

• the donor (or any person on the donor’s behalf)takes no action to limit or restrict the use or compatibil-ity of the items or services with other electronic pre-scribing or electronic health records systems;

• for items or services that are of the type that canbe used for any patient without regard to payer status,the donor does not restrict, or take any action to limit,the recipient’s right or ability to use the items or ser-vices for any patient;

• neither the physician nor the physician’s practice(including employees and staff members) makes thereceipt of items or services, or the amount or nature of

the items or services, a condition of doing business withthe donor;

• neither the eligibility of a recipient for the items orservices, nor the amount or nature of the items orservices, is determined in a manner that takes intoaccount the volume or value of referrals or other busi-ness generated between the parties;

• the arrangement is set forth in a written agree-ment that (i) is signed by the parties, (ii) specifies theitems and services being provided and the donor’s costof the items and services, and (iii) covers all of theelectronic prescribing items and services to be providedby the donor (or affiliated parties);147 and

• the donor does not have actual knowledge of, anddoes not act in reckless disregard or deliberate igno-rance of, the fact that the recipient possesses or hasobtained items or services equivalent to those providedby the donor.

2210.20.220Electronic Health Records Technology

Concurrent with its regulations to implement a Starkelectronic prescribing exception (see Electronic Pre-scribing Systems, § 2210.20.210), CMS promulgated 42C.F.R. § 411.357(w),148 excepting from the self-referralprohibition certain arrangements involving the provi-sion of interoperable149 software and directly relatedtraining services necessary and used predominantly tocreate, receive, transmit, and maintain patients’ elec-tronic health records (EHR).

The exception protects items and services providedby an entity, as defined at 42 C.F.R. § 411.351, to aphysician.150 Like the exception for electronic prescrib-ing arrangements, the EHR exception requires the do-nated items and services to be ‘‘necessary’’ and does notprotect the provision of items or services technicallyand functionally equivalent to items and services thephysician already owns or uses.151

The EHR exception also prohibits donor-imposedlimitations on a physician’s right to use the items for anypatient152 as well as any actions to disable or limit theinteroperability of any software component or imposeany other barriers to compatibility.153 Also, neither thephysician nor the physician’s practice (including em-ployees and staff members) may make the receipt ofitems or services, or the amount or nature of the items

142 Pub. L. No. 108-173, § 101, establishing Social Security Act§ 1860D-2.

143 Physicians’ Referrals to Health Care Entities With WhichThey Have Financial Relationships; Exceptions for Certain Elec-tronic Prescribing and Electronic Health Records Arrangements,71 Fed. Reg. 45140 (Aug. 8, 2006) (final rule).

144 42 C.F.R. § 411.357(v).145 ‘‘Group practice’’ is defined at 42 C.F.R. § 411.352.146 ‘‘Member’’ is defined at 42 C.F.R. § 411.351.147 This requirement is met if all separate agreements between

the donor (and affiliated parties) and the recipient incorporateeach other by reference or if they cross-reference a master list ofagreements that is maintained and updated centrally and is avail-

able for review by HHS upon request. The master list must bemaintained in a manner that preserves the historical record ofagreements. 42 C.F.R. § 411.357(v)(7)(iii).

148 Exceptions for Certain Electronic Prescribing and Elec-tronic Health Records Arrangements, 71 Fed. Reg. 45140.

149 42 C.F.R. § 411.357(w)(2). Software is deemed to be interop-erable if a certifying body recognized by HHS has certified thesoftware no more than 12 months prior to the date it is providedto the physician.

150 42 C.F.R. § 411.357(w)(1).151 42 C.F.R. § 411.357(w)(8).152 42 C.F.R. § 411.357(w)(9).153 42 C.F.R. § 411.357(w)(3).



or services, a condition of doing business with the do-nor.154

In selecting software recipients and determining theamount or nature of the items and services they are toreceive, criteria may not include the volume or value ofthe recipient’s referrals to the donor or other businessgenerated between the parties.155 A selection is deemednot to take directly into account the volume or value ofreferrals or other business generated between the par-ties if it is based on:

• the total number of prescriptions written by thephysician (but not the volume or value of prescriptionsdispensed or paid by the donor or billed to the pro-gram);

• the size of the physician’s medical practice (forexample, total patients, total patient encounters, or to-tal relative value units);

• the total number of hours that the physician prac-tices medicine;

• the physician’s overall use of automated technol-ogy in his or her medical practice (without specific ref-erence to the use of technology in connection with re-ferrals made to the donor);

• whether the physician is a member of the donor’smedical staff, if the donor has a formal medical staff;

• the level of uncompensated care provided by thephysician; or

• any other reasonable and verifiable manner thatdoes not directly take into account the volume or valueof referrals or other business generated between theparties.

The following additional conditions must be met:

• the arrangement must be set forth in a writtenagreement signed by the parties that specifies the itemsand services being provided and the donor’s cost of theitems and services, and that covers all of the electronichealth records items and services to be provided by thedonor;156

• before receipt of the items and services, the phy-sician must pay a minimum of 15 percent of the donor’scost for the items and services157 —the donor (or anyparty related to the donor) may not finance the physi-cian’s payment or loan funds to be used by the physicianto pay for the items and services;

• the items and services may not include staffing ofphysician offices or be used primarily to conduct per-sonal business or business unrelated to the physician’smedical practice;158

• the EHR software must contain electronic pre-scribing capability, either through an electronic pre-scribing component or the ability to interface with an

existing electronic prescribing system that meets theapplicable standards under Medicare Part D at the timethe items and services are provided;159 and

• the arrangement may not violate the anti-kickbacklaw or regulations governing billing or claims submis-sions.160

Finally, the transfer of the items or services mustoccur and all requirements of the exception must besatisfied on or before the sunset date for the regulation,Dec. 31, 2013.161 This date was selected to be consistentwith President George W. Bush’s Health InformationTechnology Plan, announced April 26, 2004, which in-cluded the goal of having EHR technology adopted by2014. Nothing, however, prevents CMS from extendingthe exception pursuant to notice and comment rulemak-ing.

The Stark Law provides that ‘‘[t]he provision ofitems, devices, or supplies that are used solely . . . toorder or communicate the results of tests or proceduresfor such entity’’ do not qualify as remuneration needingan exception.162 In a 2008 Advisory Opinion, CMS re-viewed a hospital system’s plans to contract with a soft-ware vendor to develop custom computer interfaces tocommunicate with staff physicians’ existing EHR sys-tems in their practices, and concluded that it was not aStark compensation arrangement in need of an excep-tion.163

According to CMS, the hospital already had devel-oped a proprietary health care software informationsystem that allowed staff physicians to view patientdata, order tests, and communicate lab test results.Furthermore, the physicians already could view lab re-ports over a protected Internet connection to the hos-pital’s system. CMS said that, according to the hospitalsystem, the interface: 1) would be used only to order orcommunicate the results of tests and procedures fur-nished by the hospital; 2) could not be modified to per-form an alternate function; and 3) could not be resold,transferred, or assigned by an affiliated physician prac-tice.

As a result, CMS found the proposed arrangementdid not meet the Stark law definition of ‘‘compensationarrangement’’ and therefore neither compliance withthe EHR nor other Stark exception was needed to pro-ceed with the arrangement.

CMS stated that its analysis was limited to the use ofthe physician practice interface to order or communi-cate results of hospital tests and procedures and mightnot be valid if the hospital system or the physicianswere to use the interface for other purposes.

154 42 C.F.R. § 411.357(w)(5).155 42 C.F.R. § 411.357(w)(6).156 42 C.F.R. § 411.357(w)(7).157 42 C.F.R. § 411.357(w)(4).158 42 C.F.R. § 411.357(w)(10).

159 42 C.F.R. § 411.357(w)(11).160 42 C.F.R. § 411.357(w)(12).161 42 C.F.R. § 411.357(w)(13).162 42 C.F.R. § 411.351.163 Centers for Medicare & Medicaid Servs. Advisory Op. No.

AO-2008-01 (May 20, 2008).





2210.20.230Ownership Interest in Entire Hospitals

An ownership interest held by a referring physician(or his or her immediate family member) in a wholehospital (except hospitals located in Puerto Rico, whichhave their own unlimited exception) can be exceptedfrom the self-referral prohibition if certain conditionsare met. Most notably, the hospital must have had phy-sician ownership and a Medicare provider agreement asof December 31, 2010, and the physician’s ownershipmust be in the entire hospital itself and not in a subdi-vision of the hospital.164

CMS also takes the position that a physician canmaintain an ownership or investment interest in a hos-pital by holding an interest in an organization that ownsa chain of hospitals, such as a health system, becausethe statute does not require that the physician have adirect interest in the hospital. To qualify for the excep-tion, however, the physician must have privileges at thespecific hospital in the chain to which he or she is refer-ring.165

Scope of Excepted Referrals. The exception coversany DHS the hospital provides. Referrals by the refer-ring physician to the hospital entity are, however, theonly DHS excepted; referrals to any other entity, suchas a home health care agency or skilled nursing facility,even if owned by the hospital, are not protected by the‘‘whole hospital’’ exception.166 Therefore, a physiciancan refer to a hospital in which he or she had an invest-ment interest, but cannot refer to a skilled nursingfacility separately owned by that same hospital.

The limited scope of referrals excepted creates a situ-ation in which a physician may refer to a laboratory in ahospital if the lab is a division of the hospital, but not ifthe lab is a separate legal entity, even if the hospital isits sole owner. It also means that, based on CMS’sinterpretation, the prohibition on referrals applies withfull force to a hospital subsidiary in which a physicianhas an indirect financial relationship, even though thephysician’s direct ownership interest in the hospital ex-cepts the physician’s referrals to the hospital itself.

Restrictions on New Physician-Owned Hospitalsand Expansions. PPACA banned the creation of newphysician-owned hospitals after Dec. 31, 2010. Physi-cian-owned hospitals with a Medicare provider agree-ment in effect at that time were grandfathered, al-though PPACA froze aggregate physician ownership insuch existing physician-owned hospitals at its level as ofMarch 23, 2010.167

Physician-owned hospitals are also banned from ex-panding their facility capacity, except in very limitedcircumstances as prescribed by new regulations. Suchhospitals cannot increase the number of operatingrooms, procedure rooms, and beds beyond that forwhich the hospital was licensed on March 23, 2010 (or,for a hospital that did not have a provider agreement onthat date, but did have one in effect as of December 31,2010), unless the Secretary grants an exception.

An ‘‘applicable hospital’’ or high Medicaid facility mayrequest an exception to the expansion limitation onceevery 2 years from the date of a CMS decision on thehospital’s most recent request. The regulations at 42C.F.R. § 411.362(c)(4) outline the procedure for submit-ting a request. A permitted increase in facility capacitymay only occur on the hospital’s main campus and maynot result in the number of operating rooms, procedurerooms, and beds for which the hospital is licensed ex-ceeding 200 percent of the hospital’s baseline number ofsuch rooms and beds.

An ‘‘applicable hospital’’ is one that:

• is located in a county whose population increase isat least 50 percent more than that of the hospital’sentire state during the most recent 5-year period forwhich data are available;

• has an annual percent of total Medicaid inpatientadmissions equal to or greater than the average percentof Medicaid admissions for all hospitals in the samecounty during the most recent fiscal year for which dataare available;

• does not discriminate against beneficiaries of fed-eral health care programs and does not permit physi-cians practicing at hospital to do so;

• is located in a state with a lower average bedcapacity than the average bed capacity nationwide dur-ing the most recent fiscal year for which data are avail-able; and

• has an average bed occupancy greater than theaverage bed occupancy statewide during the most re-cent fiscal year for which data are available.

A high Medicaid facility is one that:

• is not the sole hospital in the county in which thehospital is located;

• for the three most recent fiscal years, has an an-nual percent of total Medicaid inpatient admissionsequal to or greater than the average percent of suchadmissions for all hospitals in the same county duringthe most recent fiscal year for which data are available;and

164 Social Security Act § 1877(d)(3) [42 U.S.C. § 1395nn(d)(3)]as amended by the Patient Protection and Affordable Care Act,Pub. L. No. 111-148, (March 23, 2010), as amended by the Healthand Education Reconciliation Act of 2010, Pub. L. No. 111-152§ § 6001 and 10602, § 1106 (March 30, 2010); 42 C.F.R.§ 411.356(c)(3).

165 Physicians’ Referrals to Health Care Entities With WhichThey Have Financial Relationships, 63 Fed. Reg. 1659, 1698 (pro-

posed Jan. 9, 1998) (Stark II proposed rule). While not having theforce of law, agency interpretations in the proposed regulationsmay safely be relied upon absent contrary indications. (See Chap-ter 2205, Key Concepts and Terms, § 2205.10.30.10.)

166 Stark II final rule, Phase III, 72 Fed. Reg. at 51043.167 Patient Protection and Affordable Care Act, Pub. L. No.

111-148, § § 6001 and 10602 (March 23, 2010), as amended by theHealth and Education Reconciliation Act of 2010, Pub. L. No.111-152, § 1106 (March 30, 2010).



• does not discriminate against beneficiaries of fed-eral health care programs and does not permit physi-cians practicing at the hospital to do so.

Additional Requirements for Grandfathered Hospi-tals. Grandfathered hospitals must comply with certaindisclosure, bona fide ownership and investment, andpatient safety requirements.

Disclosure. Grandfathered hospitals are required tofile annual reports with CMS identifying physician own-ers and to disclose to referred patients and on thehospital’s website and in advertising materials that thehospital is physician-owned. These disclosure require-ments also are incorporated in the Medicare conditionsof participation for physician-owned hospitals.

Bona Fide Ownership and Investment. To ensurebona fide ownership and investment under the whole-hospital exception, the Stark regulations added byPPACA prohibit hospitals from:

• offering ownership or investment interests to aphysician owner or investor on more favorable termsthan the terms offered to others,168 as the rule requiresownership and investment returns to be distributed toeach owner or investor in the hospital in an amount thatis directly proportional to his or her ownership or in-vestment interest in the hospital;169

• directly or indirectly providing loans or financingfor any investment in the hospital by a physician owneror investor;

• directly or indirectly guaranteeing a loan, makinga payment toward a loan, or otherwise subsidizing aloan, for any individual physician owner or investor orgroup of physician owners or investors that is related toacquiring any ownership or investment interest in thehospital; or

• offering a physician owner or investor the oppor-tunity to purchase or lease any property under thecontrol of the hospital or any other owner or investor inthe hospital on more favorable terms than the termsoffered to an individual who is not a physician owner orinvestor.

Furthermore, physician owners and investors areprohibited from receiving, directly or indirectly, anyguaranteed receipt of or right to purchase other busi-ness interests related to the hospital, including the pur-chase or lease of any property under the control of otherowners or investors in the hospital or located near thepremises of the hospital. Finally, ownership and invest-ment returns must be distributed to each owner orinvestor in the hospital in an amount that is directlyproportional to his or her ownership or investment in-terest in the hospital.170

Patient Safety. If the hospital does not have a physi-cian available on the premises to provide services dur-ing all hours in which the hospital is providing servicesto the patient, the hospital must disclose this informa-tion to the patient and receive a signed acknowledgmentfrom the patient. The hospital must have the capacity toprovide assessment and initial treatment for all pa-tients, and the ability to refer and transfer patients tohospitals with the capability to treat the needs of thepatient that the hospital is unable to address.171

Hospitals should note that because states may enactgreater restrictions than the federal Stark law by pro-hibiting all physician self-referrals to specialty hospi-tals, local law also must be considered. For situations inwhich a physician has a joint venture with a hospital, seeChapter 1410, Joint Ventures and Acquisitions.

2210.30 Compliance2210.30.10Overview

Medicare overpayments, including those resultingfrom Stark violations, not repaid within 60 days of beingidentified become an ‘‘obligation’’ under the FalseClaims Act.172 Consequently, there is now greater po-tential for Stark violations to present significant fraudand abuse exposure in the form of whistleblowersuits.173

Accordingly, hospitals and other health care provid-ers should develop stringent audit and refund-process-ing policies and procedures to enable them to identifyoverpayments and/or potential Stark violations suchthat they can resolve, refund, and/or report in a timelymanner.

If a question arises as to whether an arrangementtechnically complied with Stark, a hospital may considerwhether one of the ‘‘temporary noncompliance’’ rulesset forth below would be applicable.

If it appears that a violation may have occurred, thenthe hospital may want to consider utilizing the Self-Referral Disclosure Protocol (SRDP). The SRDP pro-vides that the obligation to return overpayments underthe FCA is tolled until a settlement agreement is en-tered into, CMS removes the disclosing entity from theSRDP, or the self-disclosing entity withdraws from theSRDP.

2210.30.20Temporary Noncompliance Rules

Temporary Noncompliance. If an arrangement be-tween an entity and a physician has fully complied with

168 42 U.S.C. § 1395nn(i)(1)(D)(ii).169 42 U.S.C. § 1395nn(i)(1)(D)(v).170 42 U.S.C. § 1395nn(i)(1)(D)(v).171 42 CFR § 411.362(b)(5).

172 31 U.S.C. § 3729, et. seq.173 When overpayments are considered ‘‘identified’’ is not de-

fined in PPACA. See Social Security Act § 1128J(d) [42 U.S.C.§ 1320a-7b(a)(3)(d)].



an applicable Stark exception for at least 180 consecu-tive calendar days immediately preceding the date onwhich the arrangement became noncompliant, and thenoncompliance is due to reasons beyond the control ofthe entity, then a Stark violation is not considered tohave occurred if the parties rectify the noncompliancewithin 90 days.

CMS has stated that whether the noncompliance wasbeyond the entity’s control is a case-by-case decisionand has provided the example of noncompliance occur-ring due to loss of a HPSA designation for purposes ofthe physician retention payments exception or delays inobtaining fully signed copies of renewal agreements.174

This dispensation is not afforded to arrangementsfalling within the nonmonetary compensation or inci-dental medical staff benefits exceptions. This specialrule may only be used once every 3 years with respect tothe same referring physician.175

Temporary Noncompliance with Signature Re-quirements. Effective October 1, 2008, the Stark regu-lations include a special rule for compensation arrange-ments that fully comply with an applicable Stark excep-tion, except with respect to the signaturerequirement.176 Provided that the failure to obtain asignature was either (i) inadvertent and the partiesobtain the signature within 90 consecutive calendardays of the arrangement becoming noncompliant or (ii)not inadvertent and the parties obtain the requiredsignature within 30 consecutive calendar days, thenStark has not been violated. This special rule may, how-ever, only be used once every 3 years with respect to thesame referring physician.

In commentary, CMS has stated that a ‘‘not inadvert-ent’’ failure is a ‘‘knowing’’ failure to comply—for ex-ample, when a hospital needs to retain a physician’sservices on very short notice and faces either a Starkviolation due to the lack of a signature or having to forgothe physician’s services.177

2210.30.30Period of Disallowance

The period of disallowance is the timeframe duringwhich a financial arrangement under the Stark law didnot comply with a Stark exception. During this period oftime, referrals are prohibited under the Stark law,178

and no Medicare payments may be made for servicesassociated with the prohibited referrals. Accordingly,any amounts actually paid as a result of those prohibitedreferrals must be refunded to the government.179

The period of disallowance begins when the arrange-ment fails to meet the requirements of an applicableexception to Stark. As a consequence, the period of

disallowance is integrally related to the particular ex-ception at issue.

Where the noncompliance is related to an issue otherthan the amount of compensation, the period of disal-lowance ends on the date when the financial relationshipsatisfies all the elements of the applicable exception.

Where the noncompliance is related to the paymentof excess compensation, the period of disallowance endswhen the recipient of the excess compensation returnsit to the party that paid it and the arrangement other-wise satisfies a Stark exception. Similarly, if insufficientcompensation has been paid, the period of disallowanceends when all amounts owed are paid and the arrange-ment otherwise satisfies a Stark exception.

In commentary, CMS gives the example of a contractbetween a physician and a hospital for personal ser-vices, where the physician is paid excess compensationfor the period of January 1 through June 6. In thisexample, the parties ended the period of disallowanceon June 6 when the physician paid back the excesscompensation and the arrangement otherwise satisfiedthe personal services exception to Stark.180

CMS has emphasized in commentary that while thisrule sets the outside limit on the period of disallowance,the timeframe is ultimately determined on a case-by-case basis depending on the particular facts and circum-stances of a given situation. Therefore, the parties to aprohibited arrangement remain free to argue, on a case-by-case basis, that the arrangement was out of compli-ance for a shorter period of time.181

2210.30.40Self-Disclosure

To encourage health care providers to promptly self-disclose conduct that threatens federal health care pro-grams with fraud or abuse, the HHS has developedprovider self-disclosure protocols.

In a March 24, 2009, Open Letter to health careproviders, HHS Inspector General Daniel R. Levinsonannounced that the OIG self-disclosure program, previ-ously an avenue for resolving Stark and anti-kickbackviolations, no longer would accept disclosure of mattersinvolving liability only under the physician self-referrallaw without a colorable anti-kickback statute violationfor the same conduct.182

Responding to this development and to longstandingindustry complaints that the Stark law often imposesextraordinary liability for mere technical violationswithout regard to intent, Congress directed CMS todevelop, in consultation with the OIG, a self-disclosureprotocol under a disclosure provision set forth in

174 72 Fed. Reg. 51012, 51025-6 (Sept. 5, 2007); 69 Fed. Reg.16053, 16057 (Mar. 26, 2004).

175 42 C.F.R. § 411.353(f).176 42 C.F.R. § 411.353(g).177 73 Fed. Reg. 48707.178 See 42 C.F.R. § 411.353(c).

179 42 C.F.R. § 411.353(b) and (d).180 See 73 Fed. Reg. 48434, 48702 (Aug. 19, 2008).181 Id. at 48700.182 OIG ‘Open Letter’ to Industry Cites Kickbacks in Self-

Disclosure Protocol, 13 BNA’s Health Care Fraud Report 258(April 8, 2009).



PPACA for potential or actual Stark violations.183 Ac-cordingly, CMS released the self-referral disclosureprotocol (SRDP) in September 2010.184

Under the SRDP, all disclosures must be submitted toCMS electronically, with an original and one copymailed to CMS’s Technical Payment Policy Division.The disclosing party should receive an immediate elec-tronic confirmation as well as a letter in which CMSeither accepts or rejects the proposal.

Each submission must include:

• the name, address, national provider identificationnumber, CMS certification number, and tax identifica-tion number of the disclosing party;

• a description of the potential self-referral violationbeing disclosed, including the financial relationships atissue, applicable dates, the period of noncompliance,and the names of entities and individuals believed to beimplicated and an explanation of their roles in the mat-ter;

• a statement from the disclosing party as to why itbelieves a violation has occurred, which should include alegal analysis and the elements of any Stark exceptionsthat were not met;

• a description of how the potential violation wasdiscovered;

• a description of any compliance programs in placeat the time of the potential violation;

• a description of any notices sent to other govern-ment agencies regarding the potential violation;

• a statement attesting whether the disclosing partyhas any past history of violations or criminal actions;and

• a statement as to whether the disclosing party isaware of the matter being under investigation by anyother government agency.

The SRDP also calls for the disclosing party to sub-mit a full financial analysis of any money that is poten-tially owed as a result of Stark law violations. Once CMShas received an SRDP submission, it may ask for addi-tional documents to verify the disclosure and assist theinquiry. Disclosing parties will have at least 30 days torespond to any requests.

While CMS has expressly stated that it is not obli-gated to resolve a self-disclosed matter in any particularmanner, CMS will consider reducing any monetary pen-alties or amounts owed by a provider based upon:

• the nature and extent of the improper or illegalpractice;

• the timeliness of such self-disclosure;

• the provider’s cooperation in providing additionalinformation related to the disclosure;

• litigation risk associated with the matter dis-closed; and

• the financial position of the disclosing party.185

The SRDP also provides that CMS will work closelywith a disclosing party that structures its disclosure inaccordance with the SRDP to reach an effective andappropriate resolution.186

2210.40 Gainsharing Arrangements2210.40.10Overview

‘‘Gainsharing’’ generally refers to compensationstructures that allow hospitals to share a portion oftheir cost savings with the physicians who help to gen-erate those savings. Such arrangements implicate thefederal Civil Monetary Penalties law (CMP Law), thefederal anti-kickback statute (AKS), and the Stark law.The OIG has issued a special advisory bulletin and anumber of advisory opinions discussing gainsharing ar-rangements in light of the CMP Law and the AKS.

The federal CMP Law generally prohibits hospitalpayments to physicians intended to induce the reduc-tion or limitation of services to Medicare or Medicaidbeneficiaries.187 Likewise, the AKS prohibits the offer,payment, solicitation, or receipt of remuneration withthe intent to induce or reward referrals.188

Gainsharing arrangements are also ‘‘financial rela-tionships’’ subject to the Stark law. Such arrangements

could feasibly be structured to comply with the Starkemployment, personal services, or fair market valueexceptions, provided that all of the requirements of eachexception are met. In 2008, however, CMS proposed anew exception (42 C.F.R. § 411.357(x)) designed specifi-cally for certain incentive payment and shared savingsprograms, including gainsharing arrangements.189 Inthe regulatory commentary, CMS emphasized thattransparency, quality controls and safeguards againstpayments for referrals would be essential to a compliantshared savings program. Later in 2008, CMS solicitedadditional comments on this proposed exception, buthas not finalized it to date.190

2210.40.20Scope of the Prohibition

Fee-for-service or regular Medicare or Medicaid pro-viders are subject to the gainsharing prohibition. TheOIG has said that hospital-physician incentive plans

183 Patient Protection and Affordable Care Act, Pub. L. No.111-148, § 6409, the SRDP.

184 Id.185 Id.186 Id.

187 Social Security Act § 1128A(b)(1) [42 U.S.C. § 1320a-7a(b)(1)].

188 See 42 U.S.C. § 1320a-7b(b).189 Medicare Physician Fee Schedule for CY 2009, 73 Fed. Reg.

38502, 38548 (July 7, 2008) (MPFS proposed rule CY 2009).190 73 Fed. Reg. 69726 (Nov. 19, 2008).



http://cms.gov/PhysicianSelfReferral/Downloads/6409_SRDP_Protocol.pdf



that are limited to Medicare or Medicaid beneficiariesenrolled in risk-based managed care programs areregulated under the Social Security Act’s physician in-centive provisions191 and corresponding PIP regula-tions.192 Thus, hospital PIP plans limited to risk-basedmanaged care programs are not subject to the gainshar-ing prohibition.

Hospital physician incentive plans that do not involvepayments for direct patient care and so do not affectdirect patient care responsibilities or referral patternsalso are not covered by the gainsharing prohibition.193

Examples of such plans are those designed to rewardthe timely review and completion of patient medicalrecords.

The CMP prohibition speaks in terms of health careservices. But the OIG has said that since health careitems, such as hip joints, furnished to patients as part ofinpatient hospital stays are integral to the medical carereceived, any payment to induce a reduction or limita-tion in the quality of items—such as a cheaper im-plant—also could implicate the law.194

2210.40.30Application to Particular Arrangements

OIG Special Advisory Bulletin. The OIG issued aspecial advisory bulletin in July 1999 indicating thatthose participating in gainsharing arrangements riskedviolation of the CMP Law and the federal anti-kickbackstatute.195 The OIG stated that advisory opinions onindividual gainsharing arrangements are inappropriatebecause such arrangements pose a ‘‘high risk of abuse’’and require ‘‘ongoing oversight both as to quality ofcare and fraud that is not available through the advisoryopinion process.’’196 The danger in gainsharing is that toretain or attract high-referring physicians, ‘‘hospitalswill be under pressure from competitors and physiciansto increase the percentage of savings shared with thephysicians, manipulate the hospital accounts to gener-ate phantom savings, or otherwise game the arrange-ment to generate income for referring physicians,’’ theOIG said.

Subsequently, the OIG has, however, issued a numberof arrangement-specific advisory opinions approvingcertain gainsharing arrangements. In its advisory opin-ions, the OIG consistently identifies the following keyconcerns for shared saving arrangements: possible re-strictions or limitations on patient care; physicians‘‘cherry picking’’ healthier patients to refer to the hos-

pital offering the incentive; payments actually beingmade in exchange for referrals; and hospitals unfairlycompeting for physician loyalty and referrals.

Advisory Opinions. In approving arrangements, theOIG focuses on quality and the presence of certain keysafeguards. As representative examples, the OIG issuedtwo favorable advisory opinions in December 2007 andone in June 2009 that involved cardiac surgery at acutecare hospitals. In the 2007 arrangements, the hospitalagreed to share cost savings with a cardiac surgeongroup and in the other, the hospital made a similararrangement with an anesthesiologist group. In themost recent advisory opinion in 2009, the OIG analyzeda hospital’s plan to share savings with physicians basedon the physicians’ use of selected medical devices andsupplies for certain cardiac catheterization procedures.

In Advisory Opinion No. 07-21,197 the requesting hos-pital said the program administrator for its gainsharingarrangement with a cardiac surgery group made 25cost-saving recommendations that the surgeons couldemploy. Among these were not opening disposable com-ponents of cell-saver units until a patient experiencesexcessive bleeding, and replacing some items with lesscostly items. In connection with the first suggestion, theadministrator recommended that the surgeons imple-ment specific alternative clinical practices. In connec-tion with the second, the administrator pointed out thatin some cases the product substitutions would make noappreciable clinical difference, such as the switch toreusable blankets instead of disposable blankets.

In Advisory Opinion No. 07-22,198 the administratormade five recommendations in three categories whereanesthesiologists could reduce spending associated withthe cardiac procedures. The administrator suggested,for example, limiting the use of a specific drug and adevice used to monitor patients’ brain function to caseswhere such items were clinically indicated; substitutingless costly alternatives to certain products where clini-cally appropriate; and standardizing the use of certainfluid-warming hot lines where medically appropriate.

In its advisory opinions on these arrangements, theOIG identified specific safeguards it considered whendeciding not to seek sanctions against the requestorunder its CMP authority:199

• transparency—the arrangements clearly identi-fied cost-saving actions and resultant savings. The ar-rangements allowed for transparency and public scru-tiny, as well as physician accountability ‘‘for any adverse

191 Social Security Act § 1876(i)(8) [42 U.S.C. § 1395mm(i)(8)],1903(m)(2)(A)(x) [42 U.S.C. § 1396b(m)(2)(A)(x)].

192 Letter of Lewis Morris, Assistant Inspector General forLegal Affairs, U.S. Dep’t of Health & Human Servs., Re: SocialSecurity Act § 1128A(b)(1)-(2) and hospital-physician incentiveplans for Medicare or Medicaid beneficiaries enrolled in managedcare plans (Aug. 19, 1999).

193 Civil Money Penalties for Hospital Physician IncentivePlans, 59 Fed. Reg. 61571 (proposed Dec. 1, 1994).

194 HHS IG’s McAnaney Answers Attorneys’ Questions onGainsharing, 3 BNA’s Health Care Fraud Rep. 815 (Sept. 8, 1999).

195 Special Advisory Bulletin on Gainsharing Arrangementsand CMPs for Hospital Payments to Physicians to Reduce orLimit Service to Beneficiaries, 64 Fed. Reg. 37985, 37986 (July 14,1999).

196 Id.197 Office of Inspector Gen., U.S. Dep’t of Health & Human

Servs., Advisory Op. No. 07-21 (Jan. 14, 2008).198 Office of Inspector Gen., U.S. Dep’t of Health & Human

Servs., Advisory Op. No. 07-22 (Jan. 14, 2008).199 Office of Inspector Gen., U.S. Dep’t of Health & Human

Servs., Advisory Op. No. 07-21 (Jan. 14, 2008), 07-22 (Jan. 14,2008), 09-06 (June 23, 2009), and 08-09 (Aug. 7, 2008).



http://oig.hhs.gov/fraud/docs/alertsandbulletins/gsletter.htm




effects of the arrangement, including any difference intreatment among patients based on non-clinical indica-tors;’’

• no adverse effect on patient care—the requestorsrelied on credible medical evidence to determine thatthe implementation of the cost-saving measures wouldnot adversely affect patient care, and the requestorssaid they periodically reviewed the arrangements forany adverse affects on clinical care;

• calculation of shared savings—savings would becalculated based on the hospital’s actual reduction inout-of-pocket acquisition costs for the applicable sup-plies. If a program lasts multiple years,200 the savingscalculation is typically ‘‘rebased’’ annually to ensurethat physicians are not compensated twice for the samecost reduction.

• no discrimination or disproportionate effect onfederal program beneficiaries—the surgical proceduresto which the arrangement applied were not dispropor-tionately performed on federal health care programbeneficiaries, and the amount of cost-savings to be paidto the physicians was calculated on the basis of allrelated services, regardless of patients’ insurance cov-erage.

• limits on shared savings—there were protectionswithin the arrangements against inappropriate reduc-tions in services to patients ‘‘by utilizing objective his-torical and clinical measures to establish baselinethresholds beyond which no savings accrued’’ to thephysicians.

• disclosure and distribution to physicians—thephysicians disclosed to patients their involvement in thearrangements, and profits from the arrangementswould be distributed on a per capita basis to physiciansby their respective group practices (this payment ar-rangement was regarded as mitigating any incentiveindividual physicians might have to generate dispropor-tionate cost savings);

• product selection—when selecting ‘‘preferredproducts,’’ the hospital first considered whether theproduct was safe and effective, then whether it wasclinically appropriate. Only then did the hospital con-sider cost in selecting products. The hospital’s internalreport summarizing this analysis identified the vendorsand products with specificity. In addition, the hospitalretained credible medical documentation supporting adetermination that patient care would not be adverselyaffected by limiting the choice of products. Other prod-

ucts would still be available if a physician felt it wasclinically necessary to use a non-preferred product for aparticular patient.201

Carve-outs. If commercial-pay patients are segre-gated from Medicare/Medicaid patients, there is noMedicare/Medicaid link and the CMP law does not ap-ply. However, the OIG has said the government willexamine commercial pay carve-outs in the gainsharingcontext to make sure they are not camouflaging pay-ments to physicians for reductions or limitations in ser-vices to Medicare or Medicaid patients.202

Medicare Secondary Payers. Where a gainsharingprogram intended for commercial-pay patients containsa small number of individuals in the risk pool who haveprimary coverage with an employer or commercial in-surer and secondary coverage from Medicare, OIGspokespersons have said that the presence of the Medi-care patients will not subject the program to enforce-ment action under the CMP law. The OIG’s stated policyis not to use the presence of beneficiaries with second-ary coverage under Medicare to enforce Medicare andMedicaid anti-fraud and abuse statutes against com-mercial health care programs.203

2210.40.40Congressional Initiatives

The Deficit Reduction Act of 2005 required CMS toestablish a gainsharing demonstration project, whichwas designed to evaluate certain arrangements be-tween hospitals and physicians that could potentiallyimprove the quality and reduce the cost of patientcare.204 PPACA extended this demonstration projectuntil September 2011 and provided additional funds forit.205 It remains to be seen whether the results of thisdemonstration project could lead federal regulators toamend their guidance on gainsharing arrangements.206

PPACA also created a new care delivery model calledthe Accountable Care Organization (ACO), or the Medi-care Shared Savings Program.207 In short, an ACO is anentity comprised of health care providers, includingphysicians and hospitals that agree to take on respon-sibility for caring for a group of at least five thousandassigned Medicare beneficiaries. ACO providers will beeligible to share in any cost savings achieved beyond aset minimum savings rate, as long as certain qualitymeasures are also met. CMS has issued a Shared Sav-ings Distribution Waiver, which waives the applicabilityof Stark, AKS, and the gainsharing prohibition for thepurpose of distributing shared savings within an

200 See, e.g., Advisory Op. No. 08-21 (Nov. 25, 2008), No. 08-15(Oct. 6, 2008).

201 Although some of the arrangements described in other ad-visory opinions included not only product standardization, butalso product substitutions and limitations on the use of certainsupplies only on ‘‘as needed’’ basis, the regulatory analysis did notchange. See, e.g., Advisory Op. No. 08-21 (Nov. 25, 2008) and No.08-15 (Oct. 6, 2008).

202 Id.

203 Id.204 Pub. Law 109-171, § 5007 (Feb. 8, 2006).205 Pub. Law 111-148, § 3027 (Mar. 23, 2010).206 Special Advisory Bulletin on Gainsharing Arrangements

and CMPs for Hospital Payments to Physicians to Reduce orLimit Service to Beneficiaries, 64 Fed. Reg. 37985, 37986 (July 14,1999).

207 Pub. Law 111-148, § 3022 (Mar. 23, 2010). PPACA also pro-vides for the creation of a pediatric ACO demonstration project.See id. at § 2706.



ACO.208 In order to qualify for this waiver, the followingrequirements must be met:

• the ACO must have entered into a participationagreement with CMS and remain in good standing un-der that agreement;

• the shared savings must have been earned by theACO under the Medicare Shared Savings Program;

• the shared savings must have been earned by theACO during the term of its participation agreement,even if the actual distribution of the shared savingsoccurs after the expiration of that agreement;

• the shared savings must be distributed to oramong the ACO’s participants, providers/suppliers, or

individuals or entities who were participants or provid-ers/suppliers during the year in which the shared sav-ings were earned;

• the shared savings must be used for activities thatare reasonably related to the purposes of the MedicareShared Savings Program; and

• with respect to the gainsharing prohibition, pay-ments made directly or indirectly from a hospital to aphysician must not be made knowingly to induce thephysician to reduce or limit medically necessary itemsor services to patients under the direct care of thatphysician.

2210.50 Enforcement2210.50.10Overview

The most notable recent development in the resolu-tion of Stark law cases is the release of the Self-ReferralDisclosure Protocol (SRDP) on Sept. 23, 2010. (See§ 2210.30.40, above.) The SRDP allows providers to self-disclose technical Stark violations and potentially re-solve such cases at the lower end of the damages spec-trum. CMS is not required, however, to reduce theamount of Stark liability, and providers are required tosubmit their legal analysis as to how a Stark violationoccurred and their assessment of the total Stark liabil-ity. Given these elements, it remains to be seen howeffective the SRDP will be viewed by providers.

Pleadings and decisions in recent whistleblower FalseClaims Act cases alleging Stark violations, such asUnited States ex. rel Singh v. Bradford RegionalMedical Center,209 United States ex. rel Drakeford v.Tuomey d/b/a Tuomey Healthcare System210, andUnited States ex. rel. Kosenske v. Carlisle HMA,Inc.,211 indicate that the government is closely scruti-nizing the fair market value and commercial reason-ableness of arrangements between hospitals and physi-cians. In Tuomey, the government alleged that a com-

pensation program designed to pay part-time employedphysicians an amount equal to 131 percent of the phy-sicians’ net collections on procedures they performedwas not fair market value or commercially reason-able.212 In Bradford, the government signaled that flatfees, with respect to leasing and noncompete payments,may take into account the volume or value of referrals,if the fee is set in a manner that takes into accountreferrals or if it includes some sort of payment aboveand beyond the market value of the physician’s servicesor items provided. Finally, in Kosenske, the UnitedStates Court of Appeals for the Third Circuit held thatan arrangement between a hospital and an anesthesiol-ogy group failed to satisfy the requirements of the per-sonal services exception, and the Court explicitly re-jected the notion that any arms’ length negotiatedagreement between unrelated parties in and of itselfreflects fair market value.

Accordingly, government enforcement efforts relatedto the Stark law appear to continue to be driven mainlyby private whistleblowers. Recent cases reveal a focuson whether arrangements between physicians and hos-pitals are commercially reasonable, reflect fair marketvalue, and do not take into account referrals to thehospital.

208 CMS issued its final ACO rules in pre-publication form onOctober 20, 2011. The other waivers are the ACO Pre-Participa-tion Waiver, the ACO Participation Waiver, the Compliance withthe Physician Self-Referral Law Waiver, and the Waiver for Pa-tient Incentives.

209 No. 1:04-cv-00186-MBC, 11/10/10 (W.D. Pa. 2010).210 No. 3:05-cv-02858-MJP (D.S.C. 2010).211 554 F.3d 88 (3rd Cir. 2009).

212 The U.S. Court of Appeals for the Fourth Circuit lateroverruled and remanded the lower court’s ruling that requiredthe hospital to repay the government $44.9 million for Starkviolations. United States ex rel. Drakeford v. Tuomey Health-care System Inc., 4th Cir., No. 10-1819, March 30, 2012. Althoughmost of the decision was based on procedural grounds, two judgeson the three-judge panel went an extra step and laid out theirviews on what constituted violations of the Stark law.



2210.50.20Settlements

Settlement Alleged Misconduct Resolution/PenaltiesUnited States v. Covenant MedicalCenter (no complaint filed;settlement announced Aug. 25,2009)

The government alleged that thehospital paid five employedphysicians substantially in excess offair market value.

The hospital agreed to pay thegovernment $4.5 million to settlealleged violations of Stark and theFalse Claims Act.

United States ex rel. Boland v.Memorial Health Inc.(S.D. Ga.,No. CV406-157, settlementannounced April 24, 2008)

Between January 2003 andDecember 2006, the hospitalcompensated employeeophthalmologists at levels that werenot commercially reasonable andthat exceeded the fair market valueof the ophthalmologists’ services.

The parent company agreed withoutadmitting wrongdoing to pay $5.08million to resolve the allegations. Inaddition, Memorial entered into acorporate integrity agreement.

United States ex rel. Burns v.Northside Hospital(N.D. Ga.,settlement 10/20/06)

The hospital provided employeesfree of charge to twophysician-owned entities. Thehospital also purchased plateletproducts from one of the entities atan inflated price and paid thephysicians medical directorship feesin excess of fair market value.

The three defendants agreed to paymore than $6.9 million to resolve thealleged False Claims Act and Starklaw violations. They also enteredinto Certification of ComplianceAgreements with the OIG.

United States v. Beebe MedicalCenter(D. Del. settlementannounced March 20, 2006)

A financial arrangement betweentwo gastroenterologists and thehospital allowed the physicians toreceive 37 percent of the hospital’sfacility fee for medical proceduresthey performed at the hospital in1997, in addition to theirprofessional fees and othercompensation that was greater thanfair market value. The governmentalleged Stark and False Claims Actviolations.

The medical center and twophysicians agreed to pay the UnitedStates $1 million to settle theallegations. The medical center alsoagreed to enter into a five-yearcorporate integrity agreement.

United States v. Erlanger MedicalCenter (E.D. Tenn., settlement10/24/05)

The hospital entered into financialarrangements with physicians,allegedly intended to induce thephysicians to refer their patients tohospital facilities. The governmentalleged violations of Stark, theanti-kickback law, and the FalseClaims Act from January 1995through August 2003.

To settle the allegations, the hospitalagreed to pay $40 million—$37million to the federal governmentand $3 million to Tennessee. Inaddition, the hospital entered into acomprehensive five-year corporateintegrity agreement with the OIG.

United States ex rel. Barbera v.AMISUB (North Ridge Hospital),Inc. and Tenet Healthcare Corp.,Inc., No. 97-CV-6590 (S.D. Fla.,settlement announced March 24,2004)

The hospital and its parentcompanies entered into theprohibited financial relationshipswith employed physicians and amedical director in 1993 and 1994and billed Medicare for referralsfrom these doctors through 2000.The alleged Stark violations gaverise to False Claims Act allegations.

The defendants agreed to pay $22.5million and enter into a five-yearcorporate integrity agreement withprovisions regarding education,appointment of a compliance officer,and use of an Independent ReviewOrganization.



Settlement Alleged Misconduct Resolution/PenaltiesUnited States ex rel. Scott v.Metropolitan Health Corp.,No.01-02CV485 (W.D. Mich. settlementannounced Dec. 9, 2003)

A whistleblower alleged the hospitalsubmitted claims to Medicare forservices referred by a doctor whosepractice the hospital had bought fora price above fair market value.The hospital’sbelow-fair-market-value rentalarrangement with two otherphysicians also allegedly violatedthe Stark law.

The hospital agreed to repay theMedicare program $6.25 million tosettle the False Claims Act suit. Theagreement required the hospital tocontinue its existing corporatecompliance program for three yearsand report to the OIG certainevents applicable to federal healthcare programs.

United States ex rel.Johnson-Porchardt v. Rapid CityRegional Hospital,No.5:01-CV-05019 (D.S.D., settlementannounced Dec. 20, 2002)

The government alleged that thehospital improperly chargedMedicare for referrals fromoncology doctors with whom it hadimproper financial relationships,including a space lease with rentset below fair market value. Thecase arose from a qui tam case filedby an employee.

The hospital paid $6 million to settlethe claims. In addition, the physicianpractice agreed to pay $525,000. Thehospital and the group also enteredinto corporate integrity agreementswith the OIG.

United States ex rel. Kenner v. St.Joseph’s Hospital Corp., No.95-641 (D. Colo. settled May 2,2002)

The government alleged that thehospital and physician group had aprohibited financial relationship thatresulted in the submission of falseclaims to Medicare and Medicaid.

The hospital paid $3.75 million tosettle the False Claims Act case and$280,000 to settle state Medicaidbilling allegations.

United States ex rel. Moradi v.Community Health Assn., No.2:01-1282 (S.D.W.V., settlementannounced April 14, 2002)

The hospital allegedly paidphysicians in excess of Medicareand Medicaid reimbursement ratesfor referrals for diagnostic testsand supplies. The hospital alsoallegedly made payments that weredisguised as salary guarantees andsubmitted claims for physicianservices provided by unauthorizedpractitioners.

The hospital agreed to pay $750,000and entered into a five-yearcorporate integrity agreement withthe OIG.

2210.50.30Court Rulings

Case Citation Facts OutcomeUnited States ex rel. Singh v.Bradford Regional Medical Center,752 F. Supp. 2d 602 (W.D. Pa. 2010)

The hospital subleased a nuclearcamera from a physician practiceand paid not only the pass-throughcost of the lease, but also substantialadditional compensation, includingpayment for a non-compete agree-ment and a guaranty of the prac-tice’s financial obligations under asecond equipment lease. Whistle-blower physicians brought this caseagainst the hospital, the practice,and two physicians individually.

The court granted partial summaryjudgment, holding that the defen-dants violated Stark as a matter oflaw, but allowing the False ClaimsAct and anti-kickback claims to pro-ceed. The court held that a flat feecould ‘‘take into account’’ referrals ifthe fee is determined in a mannerthat considers anticipated or actualreferrals or if it exceeds fair marketvalue.



Case Citation Facts OutcomeUnited States ex rel. Drakeford v.Tuomey d/b/a Tuomey HealthcareSystem, Inc.,No. 3:05-CV-02858-MJP (D.S.C. 2010)

The hospital entered into part-timeemployment agreements with sur-geons and paid compensation in ex-cess of fair market value. The agree-ments included provisions preventingthe surgeons from using a competingfacility. The hospital allegedly ig-nored the warnings of counsel andprevented the whistleblower fromraising his concerns to the hospitalboard.

A jury found the hospital had vio-lated Stark but not the False ClaimsAct and awarded the government$44.9 million. The government won amotion for a new trial on the FalseClaims Act finding. The appealscourt later overruled and remandedthe lower court’s ruling that re-quired the hospital to repay the gov-ernment $44.9 million for Stark vio-lations. United States ex rel. Drake-ford v. Tuomey Healthcare SystemInc., 4th Cir., No. 10-1819, March 30,2012.

United States v. Sulzbach,No. 07-61329-CIV (S.D. Fla. Apr. 16, 2010)

The government sued Tenet Health-care Corporation’s general counselindividually under the False ClaimsAct for falsely certifying compliancewith a corporate integrity agreemententered into by a predecessor entity.The attorney allegedly was awarethat the hospital had entered intophysician contracts where the com-pensation exceeded fair market valueand resulted in financial losses forthe hospital.

The defendant prevailed on a motionfor summary judgment on thegrounds that the statute of limita-tions had run before the governmentfiled its complaint.

United States ex rel. Villafane v.Solinger, 543 F. Supp. 2d 678(W.D.Ky. 2008)

The hospital made payments to re-ferring pediatric cardiologiststhrough their university employer,and the government alleged that thearrangement did not satisfy theAMC exception to Stark.

The court adopted a ‘‘goal and pur-pose-oriented perspective ratherthan a hyper-technical one’’ andfound that the applicable party com-plied with the AMC exception. Thecourt noted that it had found ‘‘ar-rangements which the AMC excep-tion’s requirements are intended toweed out’’ and gave an example of ahospital that hired community cardi-ologists as part-time ‘‘clinical associ-ate professors’’ at salaries close tothose of its full-time cardiology fac-ulty members, although the part-timers performed minimal or no ser-vices.

United States ex rel. Kosenske v.Carlisle HMA, Inc., 554 F.3d 88(3d Cir. 2009)

A whistleblower alleged that the hos-pital and its parent company submit-ted claims pursuant to a prohibitedfinancial relationship with an anes-thesiology group in violation of Starkand the False Claims Act. Specifi-cally, the parties’ written agreementwas out of date and did not describethe services actually being providedby the group.

The trial court granted summaryjudgment in favor of the hospital,but the circuit court reversed andremanded on the grounds that thehospital had failed to show that thearrangement represented a fair mar-ket value transaction.

United States v. Rogan, 517 F.3d449 (7th Cir. 2008)

The government sued a hospital ad-ministrator under the civil FalseClaims Act for creating and conceal-ing financial arrangements that al-legedly violated Stark and the anti-kickback law.

The trial court ordered the defen-dant to pay more than $64 million intreble damages and per-claim penal-ties. On appeal, the district court’sruling was upheld.



Case Citation Facts OutcomeRobert Wood Johnson UniversityHospital, Inc. v. Thompson, No.Civ.A.04-142JWB (D.N.J. Apr. 15,2004)

Several New Jersey hospitals chal-lenged an HHS demonstrationproject that allowed the state hospi-tal association to implement a gain-sharing project in which only a fewhospitals would be allowed to partici-pate. The plaintiffs alleged that theproject violated Stark, the anti-kick-back statute and the Civil MonetaryPenalties law.

The court held that the enablingstatute for the demonstration projectallowed a waiver of compliance withStark. Although the court concludedthat the defendants lacked the requi-site intent to violate the anti-kick-back statute, it also held that thearrangement violated the prohibitionon inducements to beneficiaries.

2210.50.40Stark Self-Disclosure Settlements

The Stark Self-Referral Disclosure Protocol was pro-mulgated on May 6, 2011 pursuant to PPACA. CMSannounces settlements under the Stark Self-ReferralDisclosure Protocol on its website at www.cms.gov/Phy-sicianSelfReferral/. Prior to this, a number of potential

Stark law violations were resolved through the OIG SelfDisclosure Protocol. Short summaries of these settle-ments are included at http://oig.hhs.gov/fraud/enforce-ment/cmp/self_disclosure.asp. In 2010, for example,there appear to have been at least 18 cases involvingpotential Stark violations resolved through self disclo-sure.



http://oig.hhs.gov/fraud/enforcement/cmp/self_disclosure.asp

http://oig.hhs.gov/fraud/enforcement/cmp/self_disclosure.asp

Chapter 2210—Exhibit 1Relationships Between Physicians and Hospitals Checklist

The following list reflects key compliance requirements established by the Stark law, the civil monetarypenalties provision, CMS regulations, and agency commentary.

General Checklist□ Basic Concepts and Rules. Include in the provider’s written compliance materials for medical personnel a

plain-English explanation why financial dealings between physicians and hospitals might implicate the Starklaw and civil monetary penalties provision. Convey the basic rules that referrals of designated healthservices (DHS) cannot be made to entities with which a physician (or family member) has a financialrelationship and that hospitals cannot pay physicians for reducing services to Medicare or Medicaidbeneficiaries under the physician’s direct care.

□ Exceptions to Self-Referral Prohibition. Include in the compliance materials a plain-English explanationof the relevant Stark law exceptions (see Stark Law Exceptions Applicable to Physician-Hospital Rela-tionships, § 2210.20.10).

□ Training and Education. Train relevant personnel to recognize financial relationships that would bar thereferral of patients for DHS.

□ Gainsharing Arrangements. Train relevant personnel to recognize when arrangements exist that mightreward a physician for reducing or limiting services to Medicare or Medicaid beneficiaries under his or herdirect care. Require that all proposed cost reduction strategies that generate payments to physicians bereviewed by legal counsel in light of the 2010 amendment to the definition of ‘‘remuneration’’ in the civilmonetary provisions of the anti-kickback statute.

□ Fair Market Value Determinations. Develop a process for making and reviewing determinations of fairmarket value. Depending on need, use an objective internal process and standardized data, an externalconsultant to survey national peer data, or both.

□ Audits. Referring to a detailed checklist of Stark law exceptions, examine financial relationships with DHSproviders, including space and equipment rentals, as part of a regularly scheduled audit of operations.

□ Written Agreements. Require that all financial arrangements with physicians (and close family members)be in writing, signed by both parties, and reviewed by legal counsel. Indirect compensation arrangementsneed be signed only by those physicians who stand in the shoes of their physician organization and the entityfurnishing DHS.

Problem AreasThe following questions, if answered no, might signal referrals prohibited under the Stark law or illegal

gainsharing arrangements and should prompt immediate review by legal counsel.□ Is the remuneration a physician receives from a provider of DHS to which the physician refers patients

consistent with fair market value? Except in the case of a physician incentive plan, is the compensationunrelated in any way to the volume or value of physician referrals for DHS?

□ Are the physician’s property lease or equipment rentals, employment contracts, or other financial arrange-ments commercially reasonable, even if no referrals are made to the other party? Does each one further alegitimate business interest of the parties?

□ Do agreements with physicians have automatic renewal provisions? Are services likely to end when theagreement expires?

□ Are services performed under a personal services agreement consistent with all state and federal laws? Isthe contract capable of being terminated prior to one year only for cause?

□ Are all hospital payments to a physician (except fair market value payments received for designing costsaving protocols) unrelated to reducing or limiting services to beneficiaries under the physician’s direct care?

No. 142


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